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'Sea of red' warning on troubled Co-op Bank's half-year results

Damaging writedowns loom as investors await details of controversial £1bn bond-swap plan

Troubled Co-operative Bank’s half-year results this Thursday will be “a sea of red”, senior bankers  have warned.

The bank flagged that there will be big writedowns when it announced its £1.5bn capital-raising plans in June to fill the huge hole in its balance sheet.

Most of those charges will relate to large commercial and property loans made by the Britannia Building Society, which merged with Co-op Bank in 2009. There will also be hefty costs for the failed attempt to buy 632 branches from Lloyds Banking Group, which led to the departure of chief executive Barry Tootell.

Mr Tootell’s replacement, Niall Booker, will sit next to Co-op Group’s new chief executive Euan Sutherland on Thursday, emphasising the fact that both see the bank as an integral part of the group.

Mr Booker will also tell analysts and investors that despite the bad publicity surrounding the capital shortfall, the core retail and SME parts of the bank – which has 4.7 million customers – have continued to do well.

Details of a £1bn scheme to get bondholders to exchange their debt for new instruments and shares in the bank are still not expected to be published until October. But with a December deadline to raise that £1bn, the Co-op cannot afford to delay. The other £500m of fresh capital comes from the sale of the life and savings business to Royal London and the planned sale of the Co-op’s general insurance division.

Some 15,000 holders of the Co-op Bank’s £53m retail bond have already written with their demands to the new Governor of the Bank of England Mark Carney and Chancellor George Osborne.

Frontman Mark Taber has accused the Co-op of using “scare tactics”, and claims it should sell off one its profitable businesses, such as funeral parlours, to find the extra cash.

The Co-op argues this would neither raise enough money nor allow it to tap financial markets for  fresh capital.

Less clear is the stance being taken by US vulture funds Aurelius Capital and Silver Point Capital, which have bought large positions in two of Co-op Bank’s bonds. They could prevent those two tranches approving the rescue plan which needs every class of bond to vote for it.

At the end of the day, the Co-op argues that there “is no plan B”. If it cannot meet the Prudential Regulatory Authority’s demands or deadlines, the bank will have to go into orderly wind-down. That would mean that bondholders almost certainly got nothing back.