Amid the wreckage of a surprisingly punishing downgrade of Co-operative Bank's credit rating by Moody's last week, battered investors holding the bank's permanent interesting bearing shares (PIBS) will need to take stock of the situation. There are two things we can say for sure. Firstly, the fall in debt caused by the downgrade has led to mispricing among its various issues. Secondly, as we recently highlighted, the Co-op's problem is not so much the solvency of its operations, but its ability to generate extra liquidity for its capital buffers without the option of tapping a group of shareholders for cash, which puts junior debt holders firmly in the spotlight.
The most interesting fact for investors is that the price falls for both the Co-operative's cumulative shares and its PIBS have misplaced the pecking order of its debt, according to analysis by Cannacord Genuity. The broker believes that at least two of Co-op's debt instruments have become seriously mispriced based on their relative positions within the bank's capital structure.
For example, the 9.25 per cent non-cumulative preference shares (CPBB) are offered at 89.5p to give a net yield of 10.24 per cent. By contrast, the previously popular 13 per cent PIB (CPBC) (also known as a perpetual subordinated bond) is available at 80p, giving a yield of 16.25 per cent after tumbling by more than 50 per cent since the news of Co-op's downgrade first broke. But, as the broker points out, the preference shares, being so-called lower core tier-two capital, stand behind the PIBs in Co-op's debt pyramid, so would presumably be the first to suffer any haircut, meaning the ongoing premium is entirely due to a case of market mispricing.
Meanwhile, one of the more intriguing sub-plots to come out of the saga is the dependence of the Labour Party on the Co-operative Bank for its short-term funding. According to reports, at one point the Co-op had extended overdrafts of more than £11m to Labour, with at least two favourable loan facilities of £3.9m from 1999 still outstanding. But when political donations the bank makes are also added, then the initial estimates of Co-operative's political largesse may only be a conservative estimate, so to speak.
