Retail and hedge fund holders of Co-operative Bank's £1.3 billion of bonds have forced it to change its recapitalisation plan, potentially wresting control from the parent Co-op Group.
This is a major climbdown by the group's new chief executive Euan Sutherland and the bank's new chief executive Niall Booker.
Co-op Bank also revealed that it had found a further £100 million to £105 million of extra provisions needed to cover payment protection mis-selling, bad debts and breaches of the Consumer Credit Act.
It said this had been notified to the Prudential Regulatory Authority which had decided it did not need to increase the £1.5 billion of extra capital Co-op Bank must find by the end of 2014.
But in the climbdown with bond-holders it now looks certain that Co-op Group's stake in the bank, when it floats on the stock market probably next year, will drop from around 70 per cent to less than a controlling 50 per cent.
Co-op and its advisers are now frantically redrawing its recapitalisation plan which had been due for publication by the end of this month.
The new scheme will see retail investors who own most of the £370 million of upper tier bonds offered new instruments which will give them an income, while institutional investors, which include hedge funds Silver Point and Aurelius, will be offered a greater share of the equity in the bank in return for their £940 million of lower tier bonds.
In a statement to the stock market Co-op Group said: "The board of the group remains committed to delivering a solution that provides both the necessary capital for the bank, while preserving its ethical focus, and an acceptable outcome for bondholders, including private investors."
It said that the new terms would be "materially different" to those outlined in June, but gave no date for when those plans might be made public.
The Co-op reiterated that "failure to implement the recapitalisation plan may lead to regulatory intervention...and may even result in the bank no longer being able to continue as a going concern."
It needs to raise £1 billion for the bank by the end of this year, and the other £500 million is due next year.Reuse content