London - Britain's mutually-owned Co-operative Group will hand control of its banking arm to bondholders in order to secure their support for a rescue of the bank, three sources with knowledge of the plan told Reuters on Monday.
Any change in ownership of the Co-operative Bank could affect its image with its 4.7 million customers, many of which bank with it because of its perceived ethical focus.
The Co-op Group, which also runs supermarkets, a travel agency and funeral services, said in a statement many elements of a plan it announced in June to plug a 1.5 billion pound ($2.4 billion) capital shortfall at the bank were likely to change.
It declined to provide further details, while adding it remained committed to preserving the bank's ethical focus.
“The plan continues to evolve through the process of consultation and negotiation with bondholders,” it said.
The Co-op Bank hit trouble after racking up big losses on commercial property.
In June, the Co-op Group unveiled a plan to raise money from asset sales, bank loans and slicing the value of bonds, but that ran into opposition from creditors, including hedge funds.
NO PLAN B?
Any transfer in ownership would represent a climbdown by Co-op Group chief executive Euan Sutherland, who had previously insisted there was “no plan B” and that the only alternative to his rescue plan was a formal resolution process which would have seen the bank's assets seized by the Bank of England.
Under the original proposals, bondholders would have seen their debt wiped out and replaced with new bonds and shares in the bank which would have been floated on the stock exchange later in the year. The Co-op Group, Britain's biggest customer-owned business, would have retained a majority stake and control of the bank.
Bondholders, advised by Moelis Group, submitted an alternative plan giving them majority ownership of the bank.
Sources said the new plan would protect the Co-op bank's 15,000 retail bondholders, many of whom are pensioners who had relied on coupons from their investments. They are likely to receive a new income bearing bond rather than having their debt converted into shares.
“The group is focused on making sure retail bondholders get a deal,” said a source with knowledge of the discussions.
The Co-op Group said constructive engagement with bondholders was continuing and it was confident a proposal to recapitalise the bank could be agreed and put to bondholders. -Reuters