Thousands of private investors who hold Co-operative Bank subordinated bonds and preference shares are weighing up whether to sell now and accept an immediate loss or wait to see what happens when the bank is floated on the stock market.
On Monday, Co-op Bank announced that it would fill its £1.5bn capital hole by “bailing-in” bondholders, swapping their debt for a mixture of equity and new bonds issued by its parent company, Co-operative Group, before the bank is listed.
Doing this means that the Co-op should be able to meet the regulator’s bank safety requirements without selling off more businesses in the wider group or calling on taxpayers for bailout money. It’s a plan that has been used by struggling banks in the past including Dutch bank SNS Reaal and Ireland’s Anglo Irish.
There are more than 7,000 listed retail owners of subordinated bonds and preference shares, although Mark Taber at website Fixed Income Investments thinks there could be many more who are grouped together under individual stockbrokers.
Exactly how many shares these investors will receive is unknown and the details of what investors will get won’t be released until October. The final deal is likely to be a mixture of Co-op Group bonds, shares in Co-op Bank and perhaps another fixed income product.
Coupons on junior debt will also not be paid unless there is permission from the regulator to do so and according to analysts, this permission is unlikely to be forthcoming.
What is known is that preference shares, 13 per cent perpetual subordinated bonds and 5.5555 per cent subordinated bonds will probably get some of the worst deals in the swap because they at the lowest level in the company’s capital structure.
Investors with these may be offered more bank shares and less Co-op Group bonds, according to Rik Edwards at Canaccord Genuity.
To be included in the debt-to-equity deal, bondholders have to sign up to a “liability management exercise” and another unknown is what will happen if they refuse. There have been instances of retail investor rebellion bearing fruit. In 2011 Bank of Ireland’s threat to bail in Bristol & West Pibs holders was rejected by retail investors and Taber, who organised that action, has already set up a form for Co-op investors to fill in online if they are interested in action.
Taber says that as retail investors are vastly outnumbered by bigger investors they may otherwise struggle to make their voice heard in negotiations.
Selling now will result in a capital loss; how big that loss ends up being will depend on when you bought the bonds or preference shares.
Rik Edwards at Canaccord Genuity says that there are willing buyers out there, so it is possible to sell. “The 5.5555 per cent subordinated bond holders, for example, are now being offered 37p in the pound, which suggests that people think that the haircut that will be taken on the bonds will be 60 per cent of their par value. So what you do depends on how likely you think that outcome is.”
Lloyds branches to rebrand
Now that Co-op Bank is no longer in a position to buy the 600 Lloyds bank branches it was bidding for, plans are in motion to transform them into a new, spin-off bank called TSB.
By the end of this summer 5m Lloyds customers and 632 branches will be moved to TSB, which will then be floated on the stock market.
The changes all stem from the 2009 European Commission ruling on competition following Lloyds Bank’s acquisition of HBOS and its taxpayer bailout in 2008.
TSB, or Trustee Savings Bank, is the name of a bank that Lloyds took over in 1995, and was set up in the 1800s to encourage those of modest means, such as domestic servants, to put aside money.
Original TSB branches will be part of the 283 Lloyds TSB branches in England and Wales, 185 Lloyds TSB Scotland branches, and 164 C&G branches that will be rebranded as TSB and will operate as a separate business within Lloyds Banking Group.
Customers involved have already received letters informing them that account numbers, sort codes and internet logins will remain the same, but that there will be some changes to terms and conditions.
Customers who want to remain with Lloyds will need to close down their TSB current account and open a new account with Lloyds.
A list of the branches set to become TSB can be found at lloydstsbtransfer.com
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