Modification requested to scheme of arrangement for holders of The Co-operative Bank p.l.c.’s lower tier 2 capital securities and update on recent events

November 28, 2013

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO OR FROM AUSTRALIA, NEW ZEALAND, SOUTH AFRICA, JAPAN, CANADA OR SWITZERLAND OR ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION

RNS: The Co-operative Group Limited and The Co-operative Bank p.l.c.

Modification requested to scheme of arrangement for holders of The Co-operative Bank p.l.c.’s lower tier 2 capital securities and update on recent events

Further to the publication on 18 November 2013 of the explanatory statement dated 18 November 2013 relating to the scheme of arrangement under Part 26 of the Companies Act 2006 (the “Scheme”) proposed by The Co-operative Bank p.l.c. (the “Bank”) pursuant to which the Bank’s Liability Management Exercise (the “LME”) proposals are being made to all the holders of the Dated Notes (as defined below), certain members of an ad hoc group of holders of the Dated Notes holding, in aggregate, approximately 48.3% of the Dated Notes by value (the “Ad Hoc Group”) have requested that the Bank apply to the court to seek a modification to the Scheme.

Holders of Dated Notes should be aware that there can be no certainty that the requested modification would be approved by the court if the Bank decides to make an application to court seeking approval for the requested modification. 

Holders of Dated Notes and of the Bank’s outstanding 9.25 per cent. Non-Cumulative Irredeemable Preference Shares (ISIN: GB0002224516) (the “Preference Shares”), 13 per cent. Perpetual Subordinated Bonds (ISIN: GB00B3VH4201) (the “13% Bonds”) and outstanding 5.5555 per cent. Perpetual Subordinated Bonds (ISIN: GB00B3VMBW45) (the “5.5555% Bonds”) should also note that:

  • no modification will be made to the Scheme if as a result the settlement date of the LME would fall after 31 December 2013
  • the terms of the exchange offers and the proposals made to holders of the Preference Shares, 13% Bonds and 5.5555% Bonds are unaffected by the modification to the Scheme that has been requested, and that the timetable for the exchange offers and the proposals is currently unchanged. If the Bank decides to make an application to court seeking approval for the requested modification to the Scheme and the court requires changes which impact the timetable for the exchange offers and the proposals, an updated timetable will be published promptly
  • the Ad Hoc Group will remain locked-up to vote in favour of the Scheme whether or not the requested modification is approved by the court
  • the LME continues to require the support of the requisite majorities of the holders of the Preference Shares, 13% Bonds and 5.5555% Bonds, as well as the Dated Notes

The Dated Notes to which this proposed modification is relevant are as follows (together, the “Dated Notes”):

 

Description of the Securities ISIN  Outstanding  Principal Amount
Floating Rate Callable Step-up Dated Subordinated Notes due 2016 XS0254625998 

€34,980,000

5.875% Subordinated Callable Notes due 2019 XS0189539942

£37,775,000

9.25% Subordinated Notes due 28 April 2021 XS0620315902

£275,000,000

Fixed/Floating Rate Subordinated Notes due November 2021 XS0274155984

£8,747,000

7.875% Subordinated Notes due 19 December 2022 XS0864253868

£235,402,000

5.75% Dated Callable Step-up Subordinated Notes due 2024 XS0188218183

£200,000,000

5.875% Subordinated Notes due 2033 XS0145065602

£150,000,000

 

Current Scheme Terms

Pursuant to the Scheme, the holders of the Dated Notes have been asked to vote on proposals which, if approved by the requisite statutory majorities and sanctioned by the court and if the Scheme becomes unconditional, will result in all of the Dated Notes (plus accrued and unpaid interest on those Dated Notes up to a specified record date) being exchanged for a combination of:

  • £100 million of 11 per cent. Subordinated Notes due 2023 to be issued by the Bank (“Bank T2 Notes”); and
  • 112,500,000 new ordinary shares in the Bank (“New Ordinary Shares”) representing 45 per cent. of the total issued share capital of the Bank following completion of the LME.

The holders of the Dated Notes will also be entitled to subscribe for 62,500,000 additional new ordinary shares in the Bank (the “Additional New Ordinary Shares”) at a price of £2.00 per new ordinary share representing 25 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration equal to £125 million, pursuant to, and on the terms of, the Scheme with such subscription being underwritten by certain persons who were holders of Dated Notes as at 4 November 2013. The Scheme provides that any holder of Dated Notes is entitled to elect to subscribe for between a minimum election of 50,000 (for an aggregate subscription price of £100,000) and a maximum election of 62,500,000 Additional New Ordinary Shares.

Request to Modify the Scheme

The Requesting Noteholders have requested the Company to modify the Scheme (the Scheme, as modified by the requested modification, the “Modified Scheme”) such that all of the Dated Notes (plus accrued and unpaid interest on those Dated Notes up to a specified record date) would be exchanged for a combination of:

  • £100 million of Bank T2 Notes; and
  • 141,666,666 new ordinary shares in the Bank representing 56.67 per cent. of the total issued share capital of the Bank following completion of the LME.

The holders of the Dated Notes would also be entitled to subscribe for 33,333,334 additional new ordinary shares in the Bank at a price of £3.75 per new ordinary share representing 13.33 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration of £125 million3(iii), pursuant to, and on the terms of, the Modified Scheme. This subscription would be fully underwritten by, amongst others, the Ad Hoc Group. The Modified Scheme would provide that any holder of Dated Notes would be entitled to elect to subscribe for between a minimum election of 26,667 (for an aggregate subscription price of £100,001.25) and a maximum election of 33,333,334 additional new ordinary shares. The allocation mechanism for the allocation of additional new ordinary shares described in the explanatory statement dated 18 November 2013 relating to the Scheme would otherwise remain unchanged.

The total number of new ordinary shares in the Bank issued to holders of Dated Notes as a class under the Modified Scheme would be the same as the number to be issued under the Scheme.

The requested modification to the Scheme can only be made with the approval of the court and any application to court by the Bank would be subject to certain pre-conditions which include, among other things, that (i) holders of not less than 48% of the Dated Notes by value enter into new lock-up agreements pursuant to which they will undertake to vote in favour of the Scheme and, if the Modified Scheme is approved by the court, the Modified Scheme and (ii) the underwriting arrangements referred to above have been entered into in connection with the Modified Scheme.  The Ad Hoc Group have committed, in principle, to enter into the necessary documentation to meet these pre-conditions.

The Bank is considering the request by the Ad Hoc Group to make an application to court to seek approval for the requested modification to the Scheme. If the Bank decides to make such an application to court, the Bank would expect a court hearing to seek approval for the requested modification to be held on or around 2 December 2013 and, if the proposed modification were  approved by the court, an amended and restated explanatory statement relating to the Modified Scheme and a supplementary prospectus in connection with the Bank T2 Notes and the prospectus published by the Co-operative Group in connection with the LME would be published promptly thereafter.  At such court hearing, the Bank would also seek directions from the court confirming the procedure for dealing with account holder letters submitted pursuant to the Scheme.

To the extent the court requires any amendment to be made to the Scheme timetable, an updated timetable would be included in the documents referred to above when published.  If the Bank decides to make an application to court seeking approval for the requested modification to the Scheme, no modification would be made to the Scheme if the effect of any timetable adjustments required by the court would result in the Settlement Date of the LME and the Scheme Settlement Date occurring after 31 December 2013.

HOLDERS OF DATED NOTES SHOULD BE AWARE THAT THERE CAN BE NO CERTAINTY THAT THE REQUESTED MODIFICATION WOULD BE APPROVED BY THE COURT IF THE BANK DECIDES TO MAKE AN APPLICATION TO COURT SEEKING APPROVAL FOR THE REQUESTED MODIFICATION

If the Bank decides to make an application to court seeking approval for the requested modification to the Scheme and the requested modification were approved by the court, the table below shows the Scheme Consideration to which holders of the Dated Notes would be entitled under the terms of the Scheme and the Modified Scheme:

Existing Securities ISIN

Consideration Amount1

(per £1,000 of Scheme Claim4




New Ordinary Shares

Conversion Price




Bank T2 Notes2
New Ordinary Shares3
Scheme Modified Scheme Scheme   Modified Scheme Scheme   Modified Scheme
Floating Rate Callable Step-up Dated Subordinated Notes due 2016 XS0254625998 £102.63 £102.63 £897.37 £897.37

 

 

 

£7.7718276 per share

 

 

 

£6.1717455 per share

5.875% Subordinated Callable Notes due 2019 XS0189539942 £102.63 £102.63 £897.37 £897.37
9.25% Subordinated Notes due 28 April 2021 XS0620315902 £102.63 £102.63 £897.37 £897.37
Fixed/Floating Rate Subordinated Notes due November 2021 XS0274155984 £102.63 £102.63 £897.37 £897.37
7.875% Subordinated Notes due 19 December 2022 XS0864253868 £102.63 £102.63 £897.37 £897.37
5.75% Dated Callable Step-up Subordinated Notes due 2024 XS0188218183    £102.63 £102.63 £897.37 £897.37
5.875% Subordinated Notes due 2033 XS0145065602  £102.63 £102.63 £897.37 £897.37
   

Notes:

  1. The number of New Ordinary Shares and principal amount of Bank T2 Notes which a holder of Dated Notes will be eligible to receive in respect of its Scheme Claim will be the same irrespective of whether or not the Early Participation Threshold is achieved by the Early Participation Deadline.
  2. New sterling-denominated 11 per cent. Subordinated Notes due 2023 (ISIN: GB00BFXW0853) to be issued by the Bank.
  3. New ordinary shares to be issued by the Bank. If the LME is successfully completed, the Group’s existing equity stake in the Bank will be converted into deferred shares and effectively reduced to nil and a total of 250,000,000 new ordinary shares will be issued at that time, of which:
    1. 75,000,000 (representing 30 per cent. of the total) will be issued to the Group in consideration for its fresh injection of capital into the Bank through the LME and the 2014 Commitment (representing an effective subscription price of £6.16 per share);
    2. 141,666,666 (representing 56.67 per cent. of the total) will be issued to holders of the Dated Notes in the Scheme in exchange for their Dated Notes, to be distributed in the Modified Scheme pro rata amongst such holders based on their respective Scheme Claims (representing, based on the total value of Scheme Claims and the number of New Ordinary Shares issued in the Modified Scheme to holders of Dated Notes, an implied subscription price equal to the New Ordinary Shares Conversion Price). The New Ordinary Shares referred to in the table above are these 141,666,666 new ordinary shares; and
    3. 33,333,334 (representing the balance of 13.33 per cent. of the total) will be available for subscription by holders of Dated Notes pursuant to, and on the terms of, the Modified Scheme for an aggregate consideration equal to £125,000,002.50 (representing an effective subscription price of £3.75 per share). 
  4. A Holder’s claim in the Modified Scheme (its “Scheme Claim”) will be equal to the sum of (i) the aggregate principal amount outstanding of such Holder’s Dated Notes and (ii) the accrued and unpaid interest on such Dated Notes up to (and including) the Scheme Record Date (10 December 2013 for the Scheme; date to be confirmed for the Modified Scheme, if approved by the court), provided that a Holder’s Scheme Claim in respect of Floating Rate Callable Step-up Dated Subordinated Notes due 2016 (ISIN: XS0254625998) (which are denominated in euro) shall be the Sterling-Equivalent of such sum, calculated on the basis of an exchange rate of £0.85644 per €1.00.

Update on recent events

On 22 November 2013 the Chancellor of the Exchequer ordered an independent investigation into events at the Bank and the circumstances surrounding them to take place under section 77 of the Financial Services Act 2012. Separately, the Financial Conduct Authority and the Prudential Regulation Authority each announced on 22 November 2013 that they are considering whether they should also launch their own formal enforcement investigations. The precise scope and timing of these investigations is yet to be determined.

The regulatory and other investigations that have been recently announced are likely to subject the Bank to greater scrutiny from regulators, will take management time and result in the Bank incurring costs not currently included in its business plan which cannot be quantified at this time. Recent events may have caused some brand and reputational damage, but it is too early to form a definitive view as to the extent of such damage.  These recent events, together with the competitive landscape in which the Bank operates, the introduction of seven day account switching and the associated increased competitor marketing activity at a time when the Bank has been constrained in its ability to undertake its own marketing activity, may be a contributing factor to an increase the Bank has seen in the switching out of current accounts.  However, the Bank's retail deposit base remains broadly stable and it is too early to identify any significant trends at this point.  Further, the Bank's liquidity position remains stable.  Overall, the Bank's performance has been consistent with or, in the case of costs, slightly better than, management’s expectations.

Media enquiries

The Co-operative Group:

Russ Brady - 07880 784442

Tulchan Communications:

Susanna Voyle / Jonathan Sibun - 020 7353 4200

Investor enquiries

The Co-operative Bank:
0800 7312310
http://www.co-operative.coop/Bondholders/

Disclaimers

This announcement contains or incorporates by reference certain "forward‐looking statements" regarding the belief or current expectations of The Co-operative Group Limited (“The Group”), The Group Board, the Bank or the Bank Board (as applicable) about the Bank's financial condition, results of operations and business and the transactions described in this announcement.  Generally, but not always, words such as "may", "could", "should", "will", "expect", "intend", "estimate", "anticipate", "assume", "believe", "plan", "seek", "continue", "target". "goal", "would" or their negative variations or similar expressions identify forward‐looking statements. Such forward‐looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of The Group and the Bank and are difficult to predict, that may cause the actual results, performance, achievements or developments of the Bank or the industries in which it operates to differ materially from any future results, performance, achievements or developments expressed or implied from the forward‐looking statements. A number of material factors could cause actual results to differ materially from those contemplated by the forward‐looking statements.  The forward-looking statements contained in this announcement speak only as of the date of this announcement. 

Neither this announcement, the publication in which it is contained nor any copy of it may be taken, transmitted or distributed, directly or indirectly, into Australia, New Zealand, South Africa, Japan, Canada or Switzerland or any jurisdiction where to do so would constitute a violation of the relevant laws of such jurisdiction. Any failure to comply with this restriction may constitute a violation of securities law in those jurisdictions.  The distribution of this document in other jurisdictions may also be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for any shares or any other securities nor shall it (or any part of it) or the fact of its distribution, form the basis of, or be relied on in connection with, any contract therefore. The availability of the transactions described herein and the distribution of this announcement in certain jurisdictions may be restricted by law and persons into whose possession any document or other information referred to herein comes should inform themselves about, and observe, any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.

In particular, this announcement does not constitute an offer for sale of, or a solicitation to purchase or subscribe for, any securities in the United States. No securities of The Group or the Bank have been, or will be, registered under the US Securities Act of 1933, as amended (the "Securities Act"), and securities of The Group or the Bank may not be offered or sold in the United States absent an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. The Group and the Bank securities will be offered by means of a prospectus or Scheme document that may be obtained from the Bank and/or The Group, as applicable.

This announcement is an advertisement and not a prospectus. Investors should not make any investment decision regarding any securities referred to in this announcement except on the basis of information contained in prospectuses and exchange offer memorandum in their final form to be published by The Group and the Bank in due course in connection with the Exchange Offer. The Group and the Bank expressly reserve the right to adjust or amend the terms of the LME and the securities.

HSBC Bank plc (“HSBC”) has been appointed as a dealer manager by the Bank and The Group  to facilitate the LME and as adviser to the Bank in connection with the LME. HSBC is authorised and regulated by the PRA and the FCA and is acting exclusively for the Bank (in its capacity as a dealer manager and adviser) and The Group (in its capacity as a dealer manager) in connection with the LME and will not regard any other person (whether or not a recipient of this announcement or a holder of the Bank’s securities) as a client in relation to the LME and will not be responsible to anyone other than the Bank and The Group for providing the protections afforded to its clients or for providing advice in the relation to the LME or any other matter referred to in this announcement.

UBS Limited (“UBS”) has been appointed as a dealer manager by the Bank and The Group to facilitate the LME and as adviser to The Group in connection with the LME. UBS is authorised and regulated by the PRA and the FCA and is acting exclusively for the Bank (in its capacity as a dealer manager) and The Group (in its capacity as a dealer manager and adviser) in connection with the LME and will not regard any other person (whether or not a recipient of this announcement or a holder of the Bank’s securities) as a client in relation to the LME and will not be responsible to anyone other than and The Group for providing the protections afforded to its clients or for providing advice in the relation to the LME or any other matter referred to in this announcement.

This announcement has been issued by and is the sole responsibility of the Bank and The Group. Neither HSBC nor UBS accepts any responsibility whatsoever for, or makes any representation or warranty, express or implied, as to the contents of this announcement or for any other statement made or purported to be made by it, or on its behalf, in connection with the Bank, The Group or the LME and nothing in this announcement may be relied upon as a promise or representation in this respect, whether or not in the past or future. Subject to applicable law, each of HSBC and UBS accordingly disclaims all and any responsibility or liability, whether arising in tort, contract or otherwise, which it might otherwise have in respect of this announcement or any such statement.