Video: Co-operative Bank to plug £1.5bn hole in balance sheet by convering bonds into shares

The Co Operative Bank today announced plans to plug a £1.5bn funding shortfall identifed by regulato

The Co Operative Bank today announced plans to plug a £1.5bn funding shortfall identifed by regulators. - Credit: PA

A rescue plan for the Co-operative Group’s troubled banking arm was unveiled today in a bid to plug a £1.5billion hole in its balance sheet.

No taxpayers’ money will be involved in the plan, which will address the shortfall identified by the Prudential Regulation Authority (PRA), the new City watchdog, through a process where bonds are converted into shares.

The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through a merger with the Britannia building society in 2009 which created a financial ‘’super-mutual’’.

Group chief executive Euan Sutherland told the BBC Radio 4 Today programme that the bank was “asking our bondholders to contribute” and said the long-term plan was to now focus on retail customers.

He added: “I think we are really strengthening the group right now and we have put in, in a very short time, a very strong management team and we have got a very clear plan to drive a very successful future for this bank going forward.

“Clearly there are lessons to learn and clearly there will be a time to look back and do that but, to be honest, in the last six weeks, where I have been involved with the Co-operative group, we have focused on driving a very solid future for this bank.”

“In effect this is the best solution for all concerned,” he added. “It’s a very equitable solution and we believe that this will provide security, safety, stability for our customers and the bank going forward.”

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The PRA said it will set out further details on the capital positions of all eight major banks and building societies in a briefing on Thursday.

It launched its review after the Bank of England’s new Financial Policy Committee claimed that banks needed another £25bn of capital to prop up their balance sheets.

However, Lloyds Banking Group and Royal Bank of Scotland have already agreed with the PRA that their requirements will be met without having to raise funds through the issue of new shares or securities.

As a member-owned institution, the Co-op has been hamstrung in its ability to raise fresh capital.

It was thrown into crisis after credit ratings agency Moody’s downgraded the bank to junk status, forcing it to issue a statement that it did not need to be rescued by the taxpayer.

The Co-op is planning to raise funds through the disposal of its insurance business, although a large part of the rescue cash is coming from bondholders.

Besides institutional investors, around 5,000 individual savers, including many pensioners, who lent money to the Co-op through Permanent Interest Bearing Shares(PIBS) will be hit by the plan to exchange bonds for shares, potentially seeing around 30% wiped off the value of their investment and the rate of return cut.

The rescue will mean that any shares issued by the bank will be listed on the London Stock Exchange.

At least £1bn will be generated this year from the exchange offer, with the remaining £500million to be contributed during 2014.

Co-op chief executive Euan Sutherland said: “This announcement is good news for the Co-operative Group, the Co-operative Bank, its customers and our members.”