LONDON – The Co-operative Group, Britain’s biggest mutual business, announced a rescue plan Monday for its troubled banking arm — without involving the British taxpayer.
The customer-owned company said it would fill a 1.5 billion pound ($2.3 billion) hole in its balance sheet by converting some of its bonds into shares, which will be listed on the London stock exchange.
The Co-operative Bank’s difficulties stem from the bad commercial loans it took on taken when it merged with the Britannia building society in 2009. As a member-owned institution, Co-op has been hamstrung in efforts to raise fresh capital.
Concerns about the bank have been rising since it pulled out of a deal to buy some 630 branches from another U.K. lender, Lloyds Bank. It also stopped lending to new corporate customers last month in hopes of repairing its finances. Ratings agency Moody’s Investors Service last month downgraded the bank’s debt score to “junk” status.
The rescue, dubbed a “bail-in”, came after banking regulators demanded additional capital in order to absorb potential losses over coming years. By forcing the bank bondholders to exchange their debt — 1 billion pounds this year and 500 million pounds in 2014 — for shares, the bank doesn’t have to approach the British government for a bailout. In 2007 and 2008, a raft of big-name UK retail banks, including Royal Bank of Scotland and Lloyds Bank, had to be rescued with taxpayer’s money.
Some 5,000 investors who lent money to the Co-op through securities paying dividends of up to 13 per cent are affected by the “bail-in”.
The group’s chief executive, Euan Sutherland, says the solution will allow investors to share in the upside of the transformation of the bank and that it would focus on retail customers.
“It’s a very equitable solution and we believe that this will provide security, safety, stability for our customers and the bank going forward,” he told the BBC.
Founded in 1863, the Co-op Group has supermarkets, funeral services, pharmacies as well as 1.5 million current account holders in its Co-operative Bank.