21st Sep

Bond Holder Fury as Co-op’s Sutherland Insists There is ‘No Plan B’

Battling to fill the £1.5billion hole in its balance sheet identified by the financial regulator earlier this year, the Co-operative Bank recently announced plans to convert £1bn of existing debt into new bonds in the Co-operative Group and new equity in the bank, forcing about £500m of losses on to its investors.

As reported by Retail Bond Expert (The Only Way is Ethics – Co-op Bank Bond Holders Fight ‘Bail-In’ – August 27th) holders of PIBS and preference shares in the Bank were disgruntled at seemingly taking a large part of the pain and complained that many investors that relied upon income, particularly pensioners, were hit the hardest.

Mark Taber of website Fixed Income Investments has already assembled a group of 1,700 disaffected retail investors, and now a group of bondholders that collectively own about 43% of the Co-op Bank’s £930m lower tier-two bonds and includes US hedge funds Aurelius Capital Management and Silver Point Capital, have formed an action group and have suggested an alternative arrangement that would convert all their debt into equity in the bank.

The development comes as the group accused the bank of overstating its losses to help push through the original rescue deal. A letter from the bondholder group to Richard Pym, chairman of the bank, questions why write-offs of £379m were included in the first-half results. Losses including £150m from the value of an IT system rendering it a worthless asset, and £230m of potential tax reclaims that will remain on the balance sheet are argued to have presented an unnecessarily gloomy picture.  


Mr Bond says... "The bank that likes to flaunt its ethical credentials should treat its bondholders in a fair and reasonable fashion"

The Co-op would not comment on the accusation in the letter, but said its current restructuring plan was the best option. “While we recognise the concerns of these professional investors in the bank’s bonds, we believe that our plan, developed after full consideration of all the options, is in the long term interests of the wider stakeholders in the group and the bank,” Co-op said in a statement.

Euan Sutherland, chief executive of the Co-op group has warned that ‘there is no Plan B’ and that there is a risk that the bank will be nationalised and wound down.

However, the US investment bank acting for a consortium of bondholders has accused the Co-op of being “irresponsible” after it revealed it would only formally negotiate with bondholders once it had finalised the terms of a £1bn debt exchange later this year. “We are currently preparing the prospectus enabling the bank to float and will, of course, be happy to engage formally with all affected bondholders and preference shareholders at the right time,” continued the statement.

Bondholders argue there are options that should be considered, including a straight debt-for-equity swap. “We are disappointed that the Co-op continues to refuse to engage with bondholders,” said a spokesperson for a group of UK bondholders, thought to include CLS, the London-based property investment group.

All of the bondholder groups are calling for the Co-operative Group to put up a bigger share of the cash, possibly by divesting itself of profitable assets such as its funeral parlours. The company has warned that it would be hit with a costly credit downgrade if it were to do so.


Mr Bond says... "Investors that have been loyal to the Co-op over a long period of times should be recognised and rewarded for their support"

Whatever the final deal looks like the lesson for investors must surely be that the devil is in the detail, and that it is vital that all risks are considered.

However laudable the ambitions of ORB in achieving parity in terms of the treatment of retail and institutional investors in corporate debt, this episode demonstrates the work that remains to be done, and the importance of understanding precisely where the debt stands in the capital structure of a business before considering an investment.  

Whatever is ‘allowed’ according to the small print, Mr Bond feels strongly that investors that have been loyal to the Co-op over a long period of time, admittedly enjoying good income returns, should be recognised and rewarded for their support.

The bank that likes to flaunt its ethical credentials should treat its bondholders in a fair and reasonable fashion.  

Retail Bond Expert would like to hear from you if you stand to be affected by the proposed restructuring and would like to know what that means in practical terms with regard to the income you receive on your investments.      


Posted on 20/10/2013 10:32:39

Of course it is a bet.The foiegrn law bondholder has a choice. He/she has a 40% (roughly) bond,which can be:a)exchanged against the PSI (so roughly 30% as it is now);b)sold at 40% (as people prefer foiegrn bonds clearly over Greek law ones); here also plays possibly the legal issue of the auction risk on Greek law bonds (you donot have Greek bonds left but new ones after the exchange and CAC, which problem is solved with foiegrn law bonds, possibly part of the explanation of the price difference next to not having to go to a Kangaroo Court);c)exchange together with CDS.d) go for it and receive basically either 100% or (possibly) nothing.At the end it is basically sell now at 40% or wait. As long as prices are higher than PSI remuneration one will always sell.Leaving the complicated issue of the relation foiegrn law bonds and CDS (with possibly different conditions aside).Unlikely that before this PSI is finished we will hear that there will be paid anyway.Likely that there will be pressure as we see now with eg this statement. They will have to do it as otherwise it is a 10% option (40 minus 30) against a 60 or 70% upside, depending how you calculate it. Which would make the choice very easy I personally doubt if they want to get into this discussion on mainly 2 issues:-lateron not give the opportunity for a delayed PSI aka 0% means no more downside risk. Which means as the amounts are huge for a or several legal cases everybody will be sued. The ECB, the IMF,Everything Greek. Especially the position of the ECB looks very dodgy to me plus would be dealt with be a more or less decent court. So likely there is a delayed possibility may be not at 30% but lower, but maybe higher as well to get it off the table. Anyway Greece will likely be seen as a pariah until this is properly solved and no claims are hanging in the air.-the huge uncertainty about continued default rating and subsequently the Greek CB getting de facto deeper and deeper underwater and the risk of it all is basically put with the ECB (who will clearly not like it).Effectively we are talking 5 Bn probably (which will have to be paid lateron furthermore). 10% of total debt, minus publicly held minus held by parties whose arms can be twisted, minus 30% remuneration, minus percentage held by peple who gamble otherwise. minus foiegrn law bonds already with CAC clause (at least a part, apparently there are some).It is simply using pain in the whatever, value. Or in a different way next to a claim on Greece only, it gives an option to make trouble for the EZ and ECB as well. But as I see it the downside realistically more like 20 % the upside 100% with low amounts at stake for the EZ. It is difficult to see that the EZ wants to pay 130+ Bn to avoid the mess they see happening and do all the effort not to trigger CDS and not have a formal bust in anyway and let all this happen for say 5 Bn. For 50 maybe, but 5 is hard to believe.However imho Greece will really default somewhere probably not too far from now. So I would mainly go for shorter term debt and very likely sell them anyway if it is clear that basically nominal will be paid. Because as Greece really goes I donot see amy money coming back for private creditors.

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