Co-operative Bank bond holders likely to lose out in sale or rescue

THE Co-operative Bank has warned its investors for the first time that any rescue of the troubled lender will require them to take a hit, as it presses ahead with talks with bidders over a possible sale of the business.

The loss-making bank, which put itself up for sale in February, revealed yesterday that after receiving “a number of non-binding proposals” it had “selected several parties to enter a further phase during which these parties will be provided with additional information”.

It is understood that challenger bank Virgin Money is among the bidders through to the next round, but CYBG, the owner of the Clydesdale and York- shire brands, is not. US private equity firms JC Flowers and Cerberus have also been linked to bids.

However, in what will be a blow to its bond investors, the lender also revealed that “each of the preliminary offers selected includes some form of liability management exercise”, signalling that its suitors were proposing either a debt-for-equity swap or imposing losses on debt holders as a condition for the deal.

It means that bond holders are in the firing line whatever the fate of the bank. In case a sale fails, which some in the industry think is likely, the lender is also in talks about raising £750m through a combination of £300m of fresh equity and forcing bond holders to exchange their debt for equity.

If both rescue plans collapse, the Bank of England will be forced to step in and wind Co-op Bank up, a move that is expected to see its most attractive businesses sold off piecemeal. This would again inflict losses on bond investors.

Earlier this week the Co-operative Group wrote down the value of its 20pc stake in the bank to zero. The lender’s current woes stem from its 2009 takeover of the building society Britannia, which burdened its balance sheet with bad loans.

A group of US hedge funds took control of the bank in 2013 when they rescued the business after it discovered a £1.5bn black hole in its balance sheet.

Spokesmen for Virgin and CYBG declined to comment.