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£1.5bn Co-op rescue may see branch closures

The deal, which still needs to gain creditor approval, would see the Co-operative Group cede some 70 per cent of its holding in the bank as part of plans to tackle its £1.5bn capital shortfall.

The recapitalisation will see the Co-operative Group contribute £462m to the restructuring, with the remainder coming mostly from its new institutional backers and from new Co-op bonds, targeted to those retail investors who currently own Co-op Bank bonds.

The institutional creditors, led by hedge funds Aurelius, Monarch and Silver Point, will see the money owed to them converted into shares. The three hedge funds are also contributing £125m in cash to the restructured bank.

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Mark Taber, leader of a retail bondholder group which includes several thousand pensioners, welcomed the new rescue plan and said it could be a model for other struggling mutuals.

Under the new proposed terms, bondholders can either take income for 12 years with no capital returned at maturity, or keep some income from their bonds and have some capital at maturity.

The restructured Co-op bank will be a smaller organisation, with up 15 per cent of its 324 branches under threat of closure, while hundreds of of jobs could also be lost.

Nial Booker, chief executive of the Co-operative Bank, said: “The Bank is now focused on implementing our business plan which, following the capital raised, begins the process of strengthening and returning it to profitability over time.”

A statement from the PRA - which is expected to conduct an internal investigation this year into the Co-op’s descent into crisis - also welcomed the announcement by the bank.

Meanwhile, executives at the bank may have seen the ill-fated Project Verde deal as a “get out of jail card” to help revive the bank’s fortunes, David Ruffley has claimed.

The Conservative MP for Bury St Edmunds and member of the Treasury select committee said many at the Co-op Bank saw the collapsed deal to buy 632 Lloyds Banking Group branches as a “magic bullet” that would bring management, infrastructure and fresh capital to the bank.

Directing his comments at evidence given by Peter Marks and former bank chief executive Barry Tootell to the TSC in October, Mr Ruffley said both had shown a “wilful intent to not answer” certain questions posed to them by him and others on the TSC, and he accused them of “strategic forgetfulness”.

Timeline

• August 2008: FSA becomes involved in merger discussions

• July 2009: Merger of Co-operative Bank and Britannia Building Society approved by FSA.

• April 2011: Lloyds Banking Group begin process of divesting 632 branches, the Co-operative Bank emerged as the winning bidder

• March 2013: Co-op Bank chief executive Barry Tootell describes balance sheet as “strong”

• April 2013: Co-op Bank pulls out of Project Verde, citing difficult economic climate

• May 2013: Co-op Bank downgraded by Moody’s

• June 2013: Co-op Bank confirms a capital shortfall of £1.5bn

Adviser View

Ashley Clark, managing director of Staffordshire-based Needanadviser.com, said: “A lot of bank executives do not have the skillset to run these institutions. We all need to be made accountable for the decisions we make, and this needs to be legislated for with bigger fines.”