This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/business/2013/nov/04/co-op-group-rescue-activist-hedge-funds

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Co-op Bank to close 50 branches as hedge funds broker rescue deal Co-op Bank scrambles to convince customers its ethical stance will survive
(about 11 hours later)
The Co-operative Group on Monday sought to reassure customers of its troubled banking arm that its ethical approach could be maintained as it confirmed that activist hedge funds were taking a crucial role in the £1.5bn rescue of the bank. The Co-operative Group was scrambling late on Monday to convince the 4.6 million customers of its banking arm that its ethical stance could survive aggressive US hedge funds taking a stake in the troubled bank.
The loss-making bank indicated that a significant number of jobs were on the line as it announced a sweeping restructuring that will see the closure of around 50 branches from its 324 estate. It plans to move more customers to online banking and its network of corporate banking sectors is also to be rationalised. Even so, it warned that it would not make profits until 2015 at the earliest, and possibly not "for some years thereafter". As details of a £1.5bn rescue package were announced, the group disclosed the City regulator, the Financial Conduct Authority, was asking questions about information it provided about its financial strength in its 2012 annual report. The bank had concluded it did not need to reissue the accounts.
The restructuring is an attempt to stabilise the bank, which needs £1.5bn of extra capital to absorb losses on loans that have turned sour. Until now, it has been 100% owned by the mutual Co-operative Group. About 50 of the 324 Co-op bank branches are to close and a significant number of jobs from the 10,000-strong workforce are under threat as the new management team attempts to reverse steep losses. It could take five years to make the bank profitable again after losses caused by bad lending and the merger with the Britannia building society in 2009.
The group of supermarkets, funeral homes and pharmacies is being forced to hand 70% of the bank to bondholders led by the US hedge funds Silver Point and Aurelius, who have forced dramatic changes to the original plan first announced in June. The troubles at the bank are forcing the wider Co-operative Group, which owns supermarkets, pharmacies and funeral homes, to pump £462m into the bank – equivalent to around £60 for each of the group's 7.9 million owner-members.
Richard Pym, the new chairman of Co-op Bank, said that if the bondholders did not vote for the new scheme the only alternative was "resolution" – in other words, being taken under the control of the Bank of England, or even possibly nationalised. While this is less than the £1bn the group originally expected to stump up, it means the UK's largest mutual will own just 30% of the bank; the rest will be owned by its bondholders. Those include a group of hedge funds, led by the US-based Silver Point and Aurelius, that has forced the rewriting of a radical proposal first outlined in June, when the £1.5bn shortfall was identified.
The bank will only be able to use the Co-operative name if it keeps its ethical stance, and customers will be given their say on this next year. They were last asked for their opinions on which businesses to lend to and which ones to turn away in 2009 and, since the bank first began its ethical approach in 1992, it has turned away £1.2bn of business. An independent director will chair an ethics and values committee. The bank said "customer power" would keep it ethical. Despite concerns that the millions of pounds being used to prop up the bank would starve the Co-op of cash to invest in its other businesses, the finance director, Richard Pennycook – part of a new management team installed in the last six months – said the alternative would have been worse.
The group of hedge funds, advised by Caroline Silver of Moelis and known as LT2, stressed that it was determined to maintain the ethical stance for which the Co-op Bank is best known. "We are all extremely sorry about what has happened," said Pennycook. "But there is a difference between today and June. In June, if we hadn't taken this action the bank was going to go bust … the impact on the wider group would have been disastrous."
"We are proud that the recapitalisation will enable the Co-op Bank to continue its unique mission as a UK bank committed to the values and ethics of the co-operative movement. With the benefit of financial strength and the strong leadership brought into the bank this spring, we look forward to the resurgence of this unique institution," she said. Bondholders including 30,000 retail investors, largely pensioners, still need to back the deal, without which the bank fears it would fall under control of the Bank of England, or could be nationalised.
The Co-op Group will now put £462m into the revamped bank rather than the £1bn announced in June, while the bond holders will take a 70% stake in the bank rather than the 25% originally expected. However, the hedge funds in the LT2 are also putting in an extra £125m of capital in addition to their bonds. In an attempt to demonstrate commitment to the ethical stance the bank has been known for since 1992, the new bank will poll its customers in the spring about the businesses it should turn away on ethical grounds. Since 1992 it has turned away £1.2bn of business, including backing for arms shipments, coalmining and cleaning products tested on animals.
The LT2 group – so-called because they owned lower tier 2 debt – also revealed the identities of their backers as Beach Point Capital Management, Caspian Capital, Canyon Capital Advisors and Monarch Alternative Capital. But Andre Spicer, a professor at Cass Business School, warned: "With hedge funds at the wheel, the bank will become more ruthlessly commercial. Cutting 1,000 jobs at the same time as you launch an ethics policy is quite a contradiction."
Niall Booker, appointed as chief executive of the bank in May, said he now wanted to focus on implementing a business plan that was likely to take five years to implement. He also stressed the commitment to ethics. The bank will be able to use the Co-operative name only if it keeps an ethical stance that will be overseen by an independent director who will chair an ethics and values committee. The bank said "customer power" would keep it ethical.
"We will strive to make things simpler for our customers, removing unnecessary processes and reducing costs. We will also put greater rigour into our risk management and controls, ensuring our customers are dealt with respectfully, fairly and transparently," Booker said. The "legacy issues" of the past – largely bad loans from the Britannia Building Society deal in 2009 – were have an "impact for some time". The Co-operative Group on Monday warned its brand could be damaged by the bank continuing to use the Co-op name. The City regulator the Financial Conduct Authority and the business secretary, Vince Cable, can force the bank to change its name if the description is misleading.
Jobs are under threat with the branch closure programme. Some 15% of the 324 branches are to be shut, in sharp contrast to the ambitions of the previous management, which had planned to take the network to almost 1,000 branches via the aborted takeover of 631 branches from Lloyds Banking Group. The bank's constitution will be written from 15 November to force it to take account of the "highest standards of ethical principles" and being a "good corporate citizen … contributing to building a stronger and sustainable society".
Euan Sutherland, who joined from B&Q in May to run the entire Co-op Group, said the bank had lost its way over the previous five years when it had expanded rapidly, merging with the Britannia and then attempting the audacious – and ill-fated – takeover of the so-called Verde branches from Lloyds. It will not be able to pay dividends to shareholders unless it also considers its commitment to society and the environment. The group of hedge funds, advised by Caroline Silver of the Wall Street investment bank Moelis, and known as LT2, stressed that it was determined to maintain the ethical stance, which Silver described as a "unique mission".
It was the downgrade of the bank's debt to junk by Moody's in May that started to expose some of the problems it faced and led to concerns that the Co-op could pull out of banking altogether. The hedge funds will put in an extra £125m of capital in addition to their bonds. The secretive group admitted only on Monday that it included Aurelius – known for a long-running battle to force Argentina to pay out £800m – and Silver Point, linked to troubled financial firms such as Lehman Brothers. Others, including Beach Point Capital Management, Caspian Capital, Canyon Capital Advisors and Monarch Alternative Capital, then stepped forward.
However, Sutherland said he was optimistic for the future of the bank. Euan Sutherland, who arrived from B&Q to run the Co-op in May, refused to criticise the hedge funds, describing them as "very economically rational people" who were investing in the bank because they believed it could become profitable again. He said the bank had lost its way over the previous five years, during which it had expanded rapidly, merging with the Britannia and then attempting the audacious but ill-fated takeover of more than 600 so-called Verde branches from Lloyds Banking Group, in a move that would have given the Co-op a 1,000-strong network.
Some 30,000 private investors who bought bonds providing a 13% coupon will also need to vote on the restructuring. They are to be offered a bond issued by the group which pays a lower rate of interest and get their capital back in 12 years time or can receive the same income for the next 12 years but forgo their capital at the end of period. Under Niall Booker, who also joined in May, the bank's high-street presence will shrink. At least 15% of the 324 branches are to be shut, and £500m ploughed into investing in IT systems that previous management neglected.
Mark Taber, the activist who has campaigned on behalf of private investors, said: "It is now up to all holders to decide whether to accept but we believe it is a much better solution." Sutherland said it was his idea for Co-op Group would use £130m of the £462m it is pumping into the bank to issue new bonds to some 30,000 private investors who would otherwise have been wiped out.
Our editors' picks for the day's top news and commentary delivered to your inbox each morning.Our editors' picks for the day's top news and commentary delivered to your inbox each morning.