Co-op loses £560m and threatens its bondholders


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The Independent Online

The Co-op's beleaguered banking arm wrecked the group's interim results yesterday, contributing £709m of losses to a group-wide total of £559m, as bondholders were warned that it would be bust if they refused to back a rescue plan.

Without the bank's loss the sprawling business's other operations would have shown a profit of £150m. But Co-op reaffirmed plans to raise £1.5bn to recapitalise the banking business.

The Co-op itself will contribute £1bn as part of the "Capital Action Plan", with the bank's bondholders forced to stump up a further £500m as they see their holdings converted into shares in the bank, which will take a listing on the stock market as a result.

The group warned yesterday of "future losses" from the bank, but insisted that they would be covered by the recapitalisation plan.

The Co-op Group's chief executive, Euan Sutherland, warned bondholders that "there is no plan B". He added: "We are standing firmly behind the bank. Having looked at all the options, the plan we have come up with is the one which is in the best interests of the greatest number of stakeholders.

"We are sorry, but we are a new team grasping the nettle and getting on with fixing the problems."

The bank's chairman, Richard Pym, sought to ram that point home by warning that without the cash injection "we are not a going concern".

A vocal group of bondholders has sought to attack the plan, suggesting that the Bank of England's Prudential Regulation Authority had pushed the bank too hard and should rein in its demands. But regulators have said they will hold Co-op to the plan, and will not hesitate to demand that it raise more capital if they feel it is needed.

Bondholder representative, Mark Taber, said the Co-op's behaviour to pensioners was "disgraceful".

The losses stem largely from the Co-op's purchase in 2009 of Britannia Building Society, as well as bad loans and some costly IT problems. Much of that is now considered "non-core", but worryingly even the bank's core business reported an £82m loss for the six months ended 6 July, compared with a £78m profit in 2012. Jobs will go and branches are likely to close in a turnaround of at least four years.

Next week, Neville Richardson, the bank's former chief executive, will appear before the Treasury Select Committee inquiry into the failure of Co-op's attempt to buy just over 600 Lloyds Banking Group branches.

Q&A: How bad is it?

Q. Ouch. Co-op Bank's clearly in a much worse state than anyone thought. Can it really be rescued?

A. In a word, yes. The Bank of England's Prudential Regulation Authority reckons Co-op Bank needs £1.5bn and the plan on the table raises that. This is the PRA's first real crisis and a lot of the regulator's credibility is staked on getting this away and on Co-op Bank emerging from the conflagration as a viable, going concern.

Q. But the numbers look dreadful

A. Absolutely. But remember, much of the loss has been caused by Co-op writing down the value of the loans on its books to something that looks realistic. There's also a strong motivation among all concerned in persuading the bondholders to accept the rescue plan. The message is: "Look at how bad this is. Don't accept our terms and you'll get nothing." These results are aimed, in part, at reinforcing that message.

Q. Will they buy it?

A. The bondholders will be the big losers, and we can expect a fairly chunky dissenting vote from the retail holders. But the institutions will probably fall into line, perhaps with a little arm twisting from the Bank of England.

Q. Will the people who created this mess be called to account?

A. Looking back over the past five years or so, what do you think?