US hedge funds attack Co-operative Bank as ‘irresponsible’

A group of US hedge funds has criticised the Co-operative Bank as “irresponsible” for refusing to engage with them ahead of a crucial debt restructuring aimed at securing the future of the struggling mutual lender.

Moelis & Company, the investment bank acting for a consortium of bondholders including US hedge funds Aurelius Capital Management and Silver Point Capital, hit out at the mutual after it revealed it would only formally negotiate with bondholders once it had finalised the terms of a £1bn debt exchange later this year.

The exchange is the critical element of the Co-op’s plans to fill a £1.5bn capital hole caused by mounting losses on loans.

Bondholders will be forced to take haircuts on their investments as part of the move to convert existing debt into equity and new bonds. They are expected to contribute about £500m, with the other £500m coming from the Co-op Group.

Caroline Silver, a managing director at Moelis, told the Financial Times: “The bondholders we advise are determined to see Co-op Bank placed on a strong financial footing by the end of this year as required by the regulator.

“There are commercially reasonable ways to achieve this goal, but these require bondholder co-operation, which has consistently been offered. It would therefore strike us as irresponsible for the bank’s officers and directors to refuse to engage with bondholders and to waste time putting together a unilateral, take-it-or-leave-it offer.”

Last week Euan Sutherland, chief executive of the Co-op Group, said the mutual would formally engage with bondholders once it had set out the details of the exchange, which will be published along with a plan for reshaping the banking division, at the end of October.

The Co-op said on Monday: “While we recognise the concerns of these professional investors in the bank’s bonds, we believe that our plan . . . is in the long term interests of the wider stakeholders in the group and the bank. We are currently preparing the prospectus enabling the bank to float and will, of course, be happy to engage formally with all affected bondholders and preference shareholders at the right time.”

Bondholders have been pushing for a large stake in the newly issued Co-op Bank equity.

Someone close to the process noted that the bank would only be able to retain the Co-operative brand if the parent group owned a majority stake. They argued that losing the brand would reduce the bank’s value.

Aurelius and Silver Point own part of the £1bn of lower-tier 2 bonds involved in the exchange. Thousands of smaller retail investors that hold lower ranking securities are also braced for heavy losses.

Mr Sutherland has stressed there is “no Plan B” if the Co-op fails to gain bondholder support for the exchange. The Co-op Bank posted a £709m pre-tax loss last week after writing off almost £500m of bad loans in the first half.