The battle over Co-operative Bank 's bond restructuring looks set to be messy and protracted as small shareholders and institutions step up their efforts to stop the forcible conversion of debt into equity at a significant loss. The Co-op Group's so-called "bail-in" plan means bond investors face having to exchange debt for equity before the bank's mutual parent will inject capital. Unsurprisingly, that has been poorly received and there are now three different action groups representing various classes of investor coming up with their own plans to save the bank. But where there is uncertainty, there is opportunity, which is why a recent statement from property company CLS Holdings (CLS) is intriguing.
CLS, which has a portfolio of properties across various European countries, has built up a speculative holding of Co-op Bank bonds worth a total of £4.3m accumulated at a cost below par. CLS has a policy of investing in corporate bonds as a way of offsetting zero returns on cash; the company currently has a declared bond portfolio worth around £128m and is generally considered to have a good track record of bond wheeler dealing. The implication, of course, is that if CLS and other professional investors can see value in Co-op's bonds, then the restructuring of the bank's debt may offer enough technical and legal barriers for bondholders to emerge intact. Retail investors have more immediate concerns such as how to unlock their savings and preserve income. Their campaign is being co-ordinated by Mark Taber at Fixed Income Investments.
Subordinated bond investors generally have a good record when it comes to preserving their position through legal action. The Bristol & West case, when Bank of Ireland tried to impose a haircut on holders of its 13.335 per cent permanent interest bearing shares (PIBS), illustrates the difficulties that banks have in proving a case for a "bail-in". Legal deadlock could mean a negotiated settlement such as the one proposed by the so-called "LT2" group - institutional investors who together own up to 43 per cent of the Co-op's £1bn worth of lower-tier bonds. This group argues for a straight debt-to-equity swap for bondholders, rather than the offer of a debt for equity exchange.
Obviously, the LT2 proposal would leave the bank in the 100 per cent control of its bondholders, which might seem preferable to the Co-op Group maintaining a potential blocking stake, but it leaves smaller shareholders with shares, rather than bonds, and no immediate prospect of income - which was why many bought Co-op bonds and PIBs in the first place.
