Co-op Bank plans $912mn capital raising if sale fails

Bloomberg

Co-Operative Bank Plc, the British lender that put itself up for sale last month, said it might look to raise as much as 750 million pounds ($912 million) by selling new shares and converting debt to equity if a buyer isn’t found.
The bank may seek about 300 million pounds by selling new stock while asking bondholders to exchange their debt for equity, the Manchester, England-based lender said in a statement on Thursday. That would push the bank back above its individual capital guidance, a regulatory measure of financial strength, from this year onward.
Co-Op Bank has been attempting a turnaround since 2013, when regulators found a capital shortfall, its parent company ceded control to bondholders, and its former chairman resigned following drug allegations in a British newspaper. Ultimately rescued by U.S. hedge funds including Silver Point Capital and Perry Capital, the bank put itself up for sale last month as it operates below some regulatory guidance measures of financial strength.
“We are pleased with the interest to date and engaging with potential bidders as planned,” Chief Executive Officer Liam Coleman said in the statement. “This is a great retail bank and one that is valued by our 4 million loyal customers.”
The bank’s 400 million pounds of senior notes due in September fell about 3 pence on the pound to 87 pence after Chief Financial Officer John Worth said those bondholders may be required to help recapitalize the bank.
The company also has about 450 million pounds of junior bonds.
“That liability management exercise as implied could cover any of our liabilities,” Worth said on a call with reporters. The bank is “pleased with potential bidder interest on the sale side and on the equity raise” and with the potential bond swap following discussions with investors, he said.
The company also said it pretax loss for 2016 narrowed to 477.1 million pounds from 610.6 million pounds a year earlier. Its common equity Tier 1 capital ratio, a measure of financial strength, fell to 11 percent from 15.5 percent.
Net interest income fell by 76.7 million pounds to 394.8 million pounds driven by weaker profit margins amid low interest rates and competition, while operating costs declined by 47.1 million pounds to 444.8 million pounds helped by lower headcount and branch closures.
Co-Op Group, the funeral care to supermarkets operator, has a 20 percent stake in the lender. The bank, which doesn’t trade publicly, slumped in value to as little as 45 million pounds last month, people familiar with the matter have said.
Problems ranging from the bank’s IT system to the way it models credit risk and the separation of its pension fund from the Co-Op Group mean the Bank of England requires the lender to hold more capital because of the potential risks each issue presents to its business. Co-op Bank has a so-called Pillar 2A capital requirement, financial buffers linked to a lender’s idiosyncratic risks, of 14.5 percent of risk-weighted assets. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.
Co-Op Bank is yet to separate itself from the Co-Operative Group’s pension scheme, which means any buyer could be saddled with the liabilities of a retirement program in deficit. Worth said the potential 750 million-pound capital increase takes into account “all of the demands” made by regulators, when asked whether the pension program separation plan was included in the estimate.
The bank said it would need to sell 250 million pounds of Tier 2 debt securities in 2018 and further bonds to meet incoming minimum requirements for rules, known as MREL, in 2020 and 2021.
Co-Op Bank didn’t give any update on the sale process, or a timescale for when it might opt to raise capital as an alternative.