This morning, the Co-op Bank announced its plan to deal with the problems acquired with the Britannia Building Society and how it intends to meet the Basel III requirements for increased capital for banks. The plan has been agreed by the Banking regulator. The PRA has agreed that the bank needs £1.5billion in capital and has approved the current plan by the bank and the Co-op Group to achieve this.
Once the plan is carried out, the Bank will no longer be a wholly owned subsidiary of the Co-op Group but will be a Stock Exchange Listed Company with ordinary shareholders. The plan is that the majority of ordinary shares will still be held by the Co-operative Group.
Lets look at the detail of the plan and think about its implications. The full text of the plan is available on the Co-op Group's website. An interview with Euan Sutherland is available on Youtube as well. The main features of the plan seem to be as follows.
It has been agreed that the Bank needs £1.5 billion in Common Equity Tier 1 capital. For the meaning of "Common Equity Tier 1 Capital", see Basel Committee on Banking Supervision, "Basel III: A global regulatory framework for more resilient banks and banking systems", December 2010, revised June 2011 at pp 13-17.
£1 billion is to be contributed in 2013 and a further £0.5 billion in 2014. The first £1 billion will come from an "Exchange Offer" to be launched in October 2013. The holders of "target securities" i.e. preference shares, subordinated bonds and subordinated notes in the Bank will be offered the chance to swap those securities for a mixture of senior but unsecured debt securities in the Group, plus possibly similar securities in the bank, AND ordinary shares in the bank. See pp 6-7 of Co-op Bank Plan Full Statement 17.06.13 for a list of the securities involved and their ranking.
The exact mixture offered to those security holders will vary according to the ranking of the securities that they hold
"more junior ranking Target Securityholders are likely to be offered a substantially greater proportion of Bank Shares relative to the Group Instrument. The most senior ranking Target Securityholders are expected to be offered the substantial proportion of the Group Instrument."
Preference shareholders will get the highest proportion of shares and holders of Notes the highest proportion of debt securities (pp 6-7).
The target securities in the Exchange Offer will be redeemed below the bank's book value (p3 of the Co-op Bank Plan Full Statement 17.06.13). That is the contribution of those security holders to solving the bank's capital shortfall. For "small retail investors", the Bank is considering both "alternative options" and "the provision of independent financial advice" (p4 Co-op Bank Plan Full Statement 17.06.13).
The Co-op Group's contribution as part of the Exchange Offer is that the proceeds from issuing its senior but unsecured debt securities will be used indirectly to finance its own subscription to additional ordinary shares in the bank while Co-op Group will meet the interest and principal payments on that debt from its own resources.
Part of the £0.5 billion to be raised for the Bank in 2014 will be found by the Co-op Group. It will be made up of the proceeds from the sale of Co-operative Life Assurance and Asset Management - agreed but subject to regulatory approval - and from the sale of Co-operative General Insurance by the Group. In addition, the Bank will embark on a cost saving programme and the sale of non-core Bank assets.
The bank will focus in future on serving retail customers and small businesses rather than larger corporate and commercial customers with complex requirements.
So, what does this mean?
- The detailed proportion of the bank's ordinary shares that will be held by minority shareholders rather than the Group will not be known until the detailed Exchange Offer ("Equity Swap") is made in October and the response of Target Security holders is known.
- There has been a genuine effort to develop an "equitable" solution to the problem.
- The existing outside investors in the Bank make a contribution by getting a new bundle of ordinary shares and debt securities which do not reflect the book value of the bank.
- So, watch out for a short term reduction in the credit rating of the "target securities" subject to the Equity Swap and of the bank's senior issuer credit rating - p5 Co-op Bank Plan Full Statement 17.06.13.
- The Co-op Group raises funds based on its own credit worthiness and invests in ordinary shares in the bank as well as investing the proceeds of the sale of the insurance businesses.
- The bank employees and management participate in cost cutting and a refocus of the business.
- The Co-op group avoids selling other profitable businesses to bail out the Bank
- The requirements of UKLA and the Disclosure and Transparency, Prospectus and Listing Rules as they apply to Ordinary Shares will impose a level of transparency and accountability on the management of the Bank and, indirectly, of the Group that will be healthy and useful to Co-op Directors and members.
All in all, this looks like a reasonable and proportionate plan to deal with the serious problems that emerged earlier this year and to clean up the mess.
Using the bank's PLC status to come up with a solution looks like the least of the evils. However, we must hope that any slippery slope towards reduced Co-op Group control of the Bank is avoided.
Labels: Co-op Bank, Co-op Capital, Co-op Group, Equity Swap Plan, Euan Sutherland, PRA