The Co-operative Bank is set to trigger a cross-default mechanism to prevent itself from failing, while also raising capital as a means of rescuing itself.
The Co-op Group which owns the bank announced it would repay a set of £200m eurobonds that are linked to the Co-op Bank, two months in advance. A cross-default is where the failure to repay one debt obligation triggers default on another.
This means that if the group puts the bank into run-off, it would cause default of the bonds from the group itself.
In the group’s plans, bondholders should contribute to the rescue plan for up to £500m, with the Co-operative Group plugging the remaining £1 billion needed for the rescue. However, some bondholders do not agree with the measures.
For this reason, bondholders have proposed a plan B, in which they convert the debt into equity and add extra capital.
A representative for the Co-op said, “The Co-operative Group has served notice that it intends to redeem its £200m eurobond due on December 18 2013, on October 18 2013, ahead of the launch by the Co-operative Bank of its liability management exercise.”
The Co-operative Group is planning to raise £1.5 billion to recapitalise the Co-op bank and announced in June a ‘bail in’ plan to turn bonds into shares, making the group float on the stock market.
However, in August, the banking arm revealed it had made pre-tax losses of £559m in the first six months of 2013, mainly due to complications with the bank’s division.
Some feared that the challenges the bank is facing might affect its ethical status, but in May it reassured customers that there would be “no change to our ethos or the way we run our bank”.