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Co-op strikes debt deal

Retail investors holding Co-op preferences shares and Pibs are spared the worst haircuts in the troubled bank's restructuring programme after a vigorous investor campaign
November 4, 2013

A cash injection of £462m by the Co-operative Bank's mutual parent has opened up the possibility of a less destructive solution to the bank's capital problems for retail investors. The deal that has been hammered out between the Co-op, retail investors and institutional debtholders could secure income for retail investors for the next 12 years on a range of popular Pibs, preference shares and bonds. The deal will only be approved after a complex process of inter-linked votes representing the entire pyramid of the Co-op Bank's debts. But, the important point is that retail investors will no longer be forced to take equity in a new banking business, but will instead have the option of guaranteed income from newly issued, and tradeable, bonds.

It is estimated that retail investors had up to £150m of exposure to the Co-op's various financial instruments, a legacy of the bank's popularity with financial advisers and income-seekers. Therefore getting a good deal for small investors who depend on the income for retirement was vital. According to Mark Taber of Fixed Income Investments, who coordinated the retail investor campaign, the offer represents a reasonable deal for older investors who rely on the income from their preference shares and Pibs for security in retirement: "When the cash flow for both options is discounted over the 12 years time-frame, the outcome is broadly the same - older investors can still benefit from an income stream, while others may opt for the tax advantages associated with an amortising bond," he said.

On the table is an offer to exchange the existing 9.25 per cent preference shares and the 13 per cent Pibs for an 11 per cent subordinated note that will guarantee income for the next 12 years, with no further payments after 2025. The other option investors can take is to preserve some of their capital at the end of the 12-year term, in return for what is, in effect, a 40 per cent haircut on the original amount invested in the preference shares and Pibs as fewer new notes will be offered in exchange. In this case, the bond would effectively amortise each year.

Another popular retail investment was the 5.5555 per cent Co-op corporate bond. In this case, the offer is to receive a new tier 2 note paying a slightly higher 5.8 per cent coupon, but accept a 47 per cent capital loss at the end of 2023 when the notes mature. Again, investors may opt to register the capital gains loss on the bonds with HMRC and offset this against other, more profitable, investments.

The next stage involves investors arranging to vote for the relevant deal. This will be done across all the Co-op's asset classes and requires a 75 per cent majority for all the resolutions to pass. Investors have until 29 November to register their interest in the exchange plan and arrange to vote in the subsequent extraordinary general meeting on 11 December. Early participation will mean investors receive the best possible terms in return for their agreement. The company has full details of the liabilities management plan on its website.