Vulture funds tighten their grip to rescue Co-op Bank

Co-operative members' stake and influence falls in return for £400m

The Co-op Bank has completed a £400m cash call in a move that will reduce the Co-operative Group's stake from 30 per cent to just over 20 per cent and result in the loss of one of its directors from the board.

The cash call should finally stabilise the beleaguered bank, but it now faces the task of trying to find a new chairman who has credibility with investors and the City watchdog, after Richard Pym said he would step down.

The new shares were issued at 200p each, compared with a "grey market" price of 340p.

The group fell into the hands of outside investors, many of which are hedge funds, after a £1.5bn hole was discovered in its balance sheet, forcing it to raise cash from its bondholders to plug the gap. All four of the biggest shareholders outside the Co-operative Group – including the hedge funds Perry Capital and Silver Point – supported the cash call.

But the Co-operative's financial problems meant it had to "tail-swallow" to take up its rights to the new shares, meaning it had to sell at the higher price to fund the purchase of the new cheaper shares.

With its stake now just above 20 per cent, it will only have the right to send one director to the board – it had the right to two previously – and would lose the right to any if its stake fell beneath 15 per cent.

The Co-op's governance was branded "dysfunctional" this week by the outgoing independent director Lord Myners, who called for sweeping reforms. The group is set to table a four-point plan at its forthcoming annual meeting in Manchester.

A Co-operative Group spokesman said: "While the size of the group's shareholding will be reduced following the capital raising, we will retain a significant stake and expect to remain the single largest shareholder. The group remains supportive of the bank and its strategy."

The bank revealed in March that it needed to raise fresh money, blaming the cost of PPI mis-selling and the need for more provisions. Its chief executive, Niall Booker, said the funding would mean the bank could return to health. "The business plan is being implemented and there have been some encouraging early signs," he said.

His chairman is believed to feel that the job of turning around the bank is largely complete. Sources close to the bank indicated Mr Pym has been offered a new role "in public service" but not in the public sector. He is also the chairman of UK Asset Resolution, the taxpayer-backed "bad bank".

The fall in the Co-operative Group's stake is not expected to affect the bank's right to use the name. The two retain an association agreement, and the group could only take back the title through buying the bank out. However, the business Secretary Vince Cable could in theory remove the right to use the name now the bank is no longer co-operatively owned.