Junior bondholders face losses under Co-op rescue plan

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Holders of permanent interest bearing shares, including pensioners and retail investors, are facing losses under rescue plans to plug a capital shortfall of up to £1.8bn at The Co-operative Bank.

The Daily Telegraph reports the Co-op is considering a rescue plan which would involve cutting the income paid to junior debtholders.

Under the proposals those holding Pibs, including pensioners, investors and high net worth individuals, would be hit with losses on £310m of Pibs and a further £60m of preference shares.

Pibs are shares issued by building societies which pay a fixed rate of interest and can be traded on the London Stock Exchange. Britannia Building Society issued the Pibs before it was taken over by the Co-op in 2009.

The newspaper reports that of the £370m held as junior debt, some £30m is held by the public. The shares pay annual interest of between 5.55 per cent and 13 per cent. The resuce plans would involve cuts to the interest currently being paid and are expected to cost investors about £3m a year.

The Co-op is said to be looking at a rescue plan similar to that of West Bromwich Building Society in 2009, under which the 6.15 per cent interest on £75m of Pibs was cancelled and £182m of junior debt was converted into a new instrument to boost the mutual’s capital.

Co-op has been working to strengthen its banking subsidiary’s capital after Moody’s drastically cut the Co-op’s credit rating last month. The news prompted the resignation of Co-op Bank chief executive Barry Tootell, who has been replaced by Euan Sutherland. The Co-op Bank also stopped lending to new business customers last month.

Analysts estimate Co-op’s capital shortfall to be between £1bn and £1.8bn. The Financial Times reports financial advisers have recommended that local councils start to move their money away from the Co-op over concerns about its financial health. Over 100 councils have nearly half a billion pounds on deposit at the Co-op Bank.

Co-op withdrew from a deal to buy around 630 UK branches of Lloyds Banking Group in April.