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Co-op Group loses majority control of banking division Co-op Group loses majority control of banking division
(about 5 hours later)
The Co-operative Group will lose majority control of its banking arm after it was forced to renegotiate the bank's £1.5bn rescue with US hedge funds that own its debt. American hedge funds have forced the Co-operative Group to relinquish control of its banking arm in a deal that raises concerns about its ethical approach to business for 4.7 million customers.
The Co-operative's chief executive, Euan Sutherland, said the operator of funeral homes, pharmacies and grocery chains would own 30% of the Co-op Bank under an agreement thrashed out with the hedge funds. After months of intense talks with two US hedge funds, the UK's largest mutual – and owner of pharmacies, grocers and funeral homes – was forced to cede majority control in the bank as it battles to plug a £1.5bn capital shortfall.
The Co-op Group said earlier on Monday that it expected changes to the original plan. Sutherland then appeared on the group's website and gave a short statement in which he insisted the group would keep effective control of the bank and would "embed" its values to preserve its position in the market. The latest twist in the attempts by the Co-op to stave off nationalisation of the bank means that the group, formed by the Rochdale Pioneers in 1844, will be left with a 30% stake when the bank is floated on the stock market rather than the 75% it had originally hoped for when the rescue deal was first announced in June.
Sutherland said: "I'm pleased to announce that we have reached an agreement in principle that saves the Co-operative Bank. As a group the Co-operative retains effective control of the bank. I'm pleased to say we have secured 30% of the equity which makes us the single largest shareholder." The Unite union's national officer, Dominic Hook, said the inability of the mutual to keep control of the bank was "a tragic day for the UK". He added: "This is dreadful for the staff, customers and the wider banking industry. This may mean customers will have even less choice on the high street and means we will have yet another finance company seeking shareholder returns over better banking."
The original rescue plan would have left the Co-operative Group with 75% of the bank, which was to list on the stock market. The loss-making bank was forced to admit it had incurred another £105m of losses caused by mis-selling products including payment protection insurance.
The increased influence of the hedge funds and the Co-operative's minority stake will raise concerns about whether the bank – which installed new management only five months ago – will be able to keep its ethical stance and deals a blow to the mutual banking sector. Euan Sutherland, the former boss of the retailer B&Q who became chief executive of the Co-op in May, said the renegotiated deal was a good one for the group and its bondholders even though it had forced the group to redraw its original plan. "This is the first bank to be rescued and to survive as a standalone entity without taxpayer money," Sutherland said.
However, Sutherland said: "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this." He promised more details in the next few days. But the dramatic change in the ownership of the bank, which is likely to take place later this year, led to concerns about cultural change in the bank, its future approach to its ethical stance and the job prospects of its 10,000 staff. It is also a blow to the government, which had been hoping mutuals would create vast new challenger banks on the high street.
News of the rethink came as the bank admitted it had a larger-than-expected bill for compensating customers mis-sold payment protection insurance, and would need to boost its capital provisions by around £100m. Co-op Bank had spent a year negotiating to buy 631 branches from Lloyds Banking Group before abandoning the ambitious scheme in April when its problems began to emerge.
The US hedge funds which own debt in the Co-op Bank had warned they had enough support to block the original plan. The Co-op was asking bondholders to take £500m of losses while the group injected £1bn into the bank. Sutherland's predecessor, the Co-op veteran Peter Marks, who led the proposed takeover of the Lloyds branches, will face questions from the Treasury select committee of MPs about when he knew about the losses in the bank.
But Aurelius Capital Management, best known for forcing Argentina to pay out on its debts, and Silver Point Capital, linked to distressed groups such as Lehman, had argued that Co-op Group should give them more shares in return for the losses on their bonds. They did not want the Co-op to own as much as 50% of the bank after it floats on the stock market. Many disgruntled customers of the bank took to Twitter, one saying: "Closing my account tonight after 23 years run by members for members you have let us down." Another said: "I think I'd rather you'd have taken taxpayers money than to sell out to Corporate Vultures!"
The group – which was formed by the Rochdale Pioneers in 1844 – has conceded it will need a new restructuring plan by the time it publishes a prospectus outlining the terms of the £1.5bn rescue. That prospectus has been scheduled for next Monday and is expected to show that the Co-op Group will have to give up any hope of a majority stake in the bank. The hedge funds that have scuppered the Co-op's original plans are known for their activism at troubled companies. Aurelius Capital Management, best known for forcing Argentina to pay out on its debts, and Silver Point Capital, linked to distressed groups such as Lehman, are thought to have amassed their stakes in the bank's bonds after it was downgraded to junk in May.
The latest twist in the attempts by the Co-op to stave off nationalisation of the bank emerged as the former boss of the mutual prepares to give evidence to the Treasury select committee about the problems of the bank. Peter Marks retired in June after 40 years with the Co-op but did not attend what would have been the last annual meeting in May after the scale of the problems in the bank emerged. They had been fighting for a bigger a stake in the bank and in convincing the Co-op to reduce the group's stake to 30% they are also taking bigger losses on their bonds. The bondholders are now expected to put £1bn into the bank – compared with £500m previously – while the Co-op will now inject less than the £1bn it had originally been stumping up to prop up the bank.
Only a few months ago the bank was in talks to buy 631 branches from Lloyds Banking Group in what was seen a boost for the mutual sector. But when those talks fell apart – dealing a blow to government hopes of new competition on the high street – the problems at the Co-op started to become clear. Led by Mark Brodsky, Aurelius has been involved in debt restructurings as diverse as port owner Dubai World and the US publisher Tribune, owner of the Los Angeles Times.
The two hedge funds are thought to have built up their holdings in Co-op bonds after the bank was downgraded to junk in May and its chief executive, Barry Tootell, quit. They are known for battling to avoid losses on their investments. Led by Mark Brodsky, Aurelius has been involved in debt restructurings as diverse as Dubai World and of the US publisher Tribune, owner of the Los Angeles Times. Silver Point Capital is run two former Goldman Sachs employees, Edward Mulé and Robert O'Shea. It has a wide range of investments covering broadcasting – it bought two US TV stations out of bankruptcy – as well as carmakers and financial services and was involved in the bankruptcy of Hostess, the US food company best known for its Twinkies cakes. Silver Point Capital is run by two former Goldman Sachs employees, Edward Mulé and Robert O'Shea, and has a wide range of investments covering broadcasting – it bought two US TV stations out of bankruptcy – as well as car-makers and financial services and was involved in the bankruptcy of Hostess, the US food company best known for its Twinkies cakes.
There are also private investors in Co-op bonds who are concerned about the scale of their losses. There are reports the group could set up a hardship fund for these investors, who bought the bonds for retirement income. Activist investor Mark Taber, who represents the private investors, says there around 15,000 of them and many are "very elderly and vulnerable". The Co-op Group is thought to be ready to make a concession to 15,000 private investors – who were "very elderly and vulnerable", it had been warned. It is expected to swap their bonds for new ones that continue to pay them regular income streams rather than handing them shares. Trading in bonds has been temporarily suspended.
Sutherland said the deal would be in the interests of the "hard-working families" that had invested in the bank. The precise details, which are still being hammered out, are likely to be revealed in the coming days. Sutherland said customers should not be concerned about the changing structure of ownership. The Co-op Bank has been a plc for some time but it is fully-owned by the mutual group which is now relinquishing total control.
For the first time Sutherland said the bank's ethical approach would be embedded in its articles of association. "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this," he said.
But Andre Spicer, professor of organisational behaviour at Cass Business School, doubted that the bank would maintain its ethical stance in the long term. "History suggests that once a mutual bank is privatised it drops the focus on doing good to focus on doing well for shareholders. Many ex-mutuals became some of the worst offenders in the lead-up to the financial crisis . The number of staff the Co-op employs is likely to drop as management search for efficiencies. Staff who remain are likely to find themselves loaded down with various restructuring efforts. Despite assurances by the new owners, the Co-op is likely to have a more commercially focused culture."
New management had been hired for the bank only as recently as May when a former veteran of HSBC, Niall Booker, was appointed as chief executive. He is expected to stay as part of the deal. Richard Pym, the former boss of Alliance & Leicester and now the chairman of nationalised parts of Northern Rock and Bradford & Bingley, was also appointed as chairman for the Co-op Bank. The pair had been part of the independent committee set up by the Co-op Group to review the approach from the hedge funds.
While a deal has been hammered out in principle, the details will need to be voted on by bondholders. As part of the attempt to raise the £1.5bn ordered by the Bank of England, the Co-op asset management division has been sold off and the insurance arm is also on the block.
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