Co-Operative Group cedes control to creditors after 141 years

The Co-Operative Group Ltd has agreed to cede control of its banking unit to creditors after 141 years, part of a deal to allow the lender to plug a £1.5bn (€1.77) capital shortfall.

Co-Operative Group, a mutual whose businesses range from supermarkets to funeral parlours, will keep a 30% stake in the Co-Operative Bank Ltd after reaching an agreement in principal with creditors, chief executive Euan Sutherland said in a statement.

The Manchester-based company will remain the bank’s largest shareholder, he said. The group, which traces its roots to Britain’s 19th century industrial north, had sought to keep control over its banking unit while forcing bondholders to exchange subordinated debt for new equity and senior debt. Bondholders may now seek to find a buyer for the lender, which has 4.7 million customers.

“It’s difficult to imagine a group of bondholders coming together to take over a bank unless they have some comfort, possibly from another party,” said Eva Olsson, a credit analyst at Mitsubishi UFJ Securities in London.

“They normally just want their money back,” she said.

“To start a bank of that size is very costly and difficult in the UK because there are very high barriers to entry,” she said.

An ownership change may also trigger reductions in the size of Co-Operative Bank’s 7,800-strong workforce, according to Andre Spicer, professor of organisational behaviour at Cass Business School in London.

Regulators pushed the Co-Operative Group to close the capital deficit following the failure of the bank’s bid for more than 600 Lloyds Banking Group Plc branches last year, a deal that would have more than doubled its outlets.

Co-Operative Group couldn’t plug the gap by turning to shareholders in a rights offering, like competitors including Barclays Plc. Instead, the group pledged £1bn to the banking unit through selling assets and increasing borrowings, then asked bondholders to provide a further £500m in a debt swap.

LT2, a group of bondholders which owns 43% of the lender’s lower tier-2 securities, rejected that proposal and, advised by Moelis & Co, pushed to convert the bank’s subordinated bonds and preferred shares into common stock.

The Co-Operative Bank’s €500m of 2.375% senior bonds due in October 2015 gained 1.13c in the euro to 95.86c, the highest since May, according to data compiled by Bloomberg.

* Bloomberg