Britain’s Co-operative Group will force bondholders to help plug a £1.5bn ($2.4bn) capital hole, avoiding a repeat of unpopular taxpayer-funded bailouts made during the financial crisis, Reuters reported on Tuesday
Using a “bail-in” rescue model, bondholders will have to swap their debt for new bonds and equity in the bank, which will be listed on the London Stock Exchange.
The Co-op Group, Britain’s biggest customer-owned business, will also provide financial support for its banking unit , the Co-op said on Monday.
Europe is pushing ahead with plans to implement a “bail-in” regime that would force bondholders and depositors, rather than taxpayers, to bear the cost of failed banks and the Co-op’s approach could become a blueprint for future rescues.
“We have put in place a detailed and comprehensive solution to meet the current and longer-term capital requirements of the bank. In doing so we have agreed a plan to ensure its future,” said Co-op Group Chief Executive Euan Sutherland.
Co-op Group, which runs supermarkets, pharmacies and funeral services, will retain a majority stake in the Co-op Bank, which has 4.7 million customers. Sources said bondholders are likely to end up with at least a quarter of the bank’s shares.
Sutherland said he was confident a “good proportion” of bondholders would support the move, given that coupons on their debt will be canceled making them effectively worthless. If they refused, the bank would face the threat of nationalization.
The bank’s future has been in question since ratings agency Moody’s cut its credit rating to junk status and warned it might need taxpayer support – something the bank denied.
Its capital position had come under scrutiny since it pulled out of a deal to buy hundreds of bank branches from Lloyds Banking Group in April.
Analysts have blamed Co-op Bank’s problems on its takeover of the Britannia Building Society in 2009.
Industry sources say Britannia, which had lent aggressively on commercial property, was likely to have required a taxpayer-bailout had it not been bought by the Co-op.
Co-op said it would hive off toxic assets worth about £14.5bn into a ‘bad bank,’ most of which are from Britannia, as part of a restructuring.
Sutherland has overhauled Co-op’s management since joining from retailer Kingfisher in May.
He declined to comment on whether former chief executive Peter Marks, who led the Britannia acquisition, or other former executives should have past pay rewards clawed back. Marks received a £103,000 long-term performance bonus in 2012 and a 490,000 bonus for 2011.
Co-op said the bail-in plan will generate 1 billion pounds of new capital this year and £500 in 2014.