Reuters: Hot Stocks: Britain's Co-op Bank targets bondholders to plug shortfall

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Britain's Co-op Bank targets bondholders to plug shortfall Jun 3rd 2013, 17:00 Mon Jun 3, 2013 1:00pm EDT * Bondholders could be hit as part of broader plan * Asset sales also under consideration * Debt restructuring and buyback may be best option * Bank must agree plan with regulator by end of June By Aimee Donnellan and Matt Scuffham LONDON, June 3 (IFR) - The Co-operative Bank may cut payouts to bondholders to help to plug a capital shortfall that could be as high as 1.8 billion pounds ($2.7 billion), banking sources said on Monday. Parent company the Co-operative Group, Britain's biggest customer-owned business, has been exploring options for its troubled banking division since Moody's cut the lender's credit rating to junk status last month, raising fears over the bank's future. The latest option under consideration would see the bank defer coupons on subordinated debt to preserve capital, a London-based debt capital markets banker said. The move would be part of a three-pronged approach to boost capital, including the sale of parts of its business and a restructuring of its subordinated debt in conjunction with a bond buyback. Concern over Co-op Bank's capital position first surfaced after it pulled out of a deal to buy hundreds of bank branches from Lloyds Banking Group in April. The bank has until the end of the month to agree a rescue plan with Britain's Prudential Regulation Authority, which has identified an industry-wide capital shortfall of 25 billion pounds and is holding talks with banks individually. The final details of Co-op Bank's plans have yet to be finalised, the sources said, and will depend upon the size of the shortfall. Analysts have estimated that it could be between 800 million pounds and 1.8 billion pounds. EU PRECEDENT Asset sales and a further slimming of the bank, which has stopped lending to new business clients, are both on the table, the sources said. However, bondholders are likely to have to share at least some of the pain. A precedent was set when British banks Lloyds and RBS were blocked from paying coupons by the European Union after their state bailout. "Deferring coupons will certainly save the group some cash and restore some of its capital position, but alone it will not be enough," the banker said. The option of a debt buyback in conjunction with a restructuring of the bank's debt is likely to be welcomed by investors. Some are keen to secure an exit, especially if Co-op buys at a premium to where the bonds are trading at present. "The trading prices on Co-op debt suggest that investors do not think they will be able to recover par on their securities," the banker said. Such an arrangement would involve the bank offering to buy back bonds at a premium to the market price but a discount to par value. If the bonds are trading at 60 cents in the euro, for example, it can pay 70 cents, giving a premium to the investor while making a capital gain of 30 percent. Market participants reported that bond values fell by as much as half after the Moody's downgrade. Though a recent recovery makes such a buyback exercise less attractive than before, industry experts doubt that the bank has many other options to raise capital in the public market. ($1 = 0.6596 British pounds) (Editing by David Goodman) Link this Share this Digg this Email Reprints

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