The Co-operative Group announces Recapitalisation Plan for The Co-operative Bank

November 04, 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 and the Co-operative Bank

Update on The Co-operative Bank’s strategic plan and on the Recapitalisation Plan to generate £1.5 billion of Common Equity Tier 1 for the Co operative Bank to meet the Prudential Regulation Authority’s capital requirement


The Co-operative Group announces Recapitalisation Plan for The Co-operative Bank

  • Comprehensive Plan in place to generate the necessary £1.5bn of Common Equity Tier 1 capital in line with regulatory requirement 
  • Binding commitments from the LT2 Group of investors; support from other institutional investors; backing for Plan from leading retail investor campaigners; wider investor vote now required
  • Group to retain 30% of Bank as largest single shareholder; majority of Bank Board to be independent directors
  • Values and Ethics to be legally embedded in Bank constitution; to be upheld by a dedicated Board committee
  • Total Co-operative Group contribution of £462m, including £129m Group-funded solution targeted at retail investors; LT2 Group to inject £125m of new capital in addition to equitisation of their existing bonds
  • Large number of retail investors offered choice of two options: lower annual payment with future capital sum or existing annual payment maintained for 12 years without future capital sum
  • Bank turnaround strategy to focus on retail and small and medium sized business customers

On 17 June 2013, The Co-operative Group Limited ("The Group”) and the Co operative Bank p.l.c. (the “Bank”) announced the outcome of the regulatory review of the Bank’s capital position which required the Bank to raise £1.5 billion of further Common Equity Tier 1 capital (“CET1”). That announcement included an outline of a plan to raise the capital, including by means of a Liability Management Exercise (the “LME”) involving investors in the Bank’s subordinated capital securities.

Having held extensive and constructive discussions with groups of investors in all classes of the subordinated capital securities, The Group and the Bank are today launching a revised Recapitalisation Plan (the “Plan”) to generate the required level of CET1. This Plan has the support of these groups of investors.

Specifically, an ad hoc group of holders of 48% of the nominal value of the Bank’s lower tier 2 capital securities (the “LT2 Group”) has signed lock-up agreements to vote in favour of the LME.

The Recapitalisation Plan is also supported by Mark Taber and others who have organised an ad hoc steering committee to campaign on behalf of retail investors. The offering to holders of the Bank’s Upper Tier 2 perpetual subordinated bonds and Preference Shares reflects the discussions the Bank and The Group have had with that committee.

Discussions have also been held with a group of institutional investors in the Bank’s Upper Tier 2 perpetual subordinated bonds, who have indicated their intention to support the Plan.

The Plan has been discussed in full with the Prudential Regulation Authority and the Financial Conduct Authority, the Bank's regulators.

The Plan now needs to be agreed by a significant majority of all holders of subordinated capital securities for the LME to be successful. In addition to the details of the Plan, the Bank is disclosing further detail on its new strategy.

The subordinated capital securities involved in the LME are as follows (together, the “Existing Securities”):


Description of the Securities ISIN  Outstanding Principal Amount
Preference Shares:

   9.25% Non-Cumulative Irredeemable Preference Shares 

GB0002224516

£60,000,000

Perpetual Subordinated Bonds:

13% Perpetual Subordinated Bonds*

GB00B3VH4201

£110,000,000

5.5555% Perpetual Subordinated Bonds* 

GB00B3VMBW45

£200,000,000

Dated Notes:
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

* Issued by the Bank in replacement of Britannia Building Society permanent interest bearing shares on its merger with Britannia on 1 August 2009

Summary

  • The Bank to be provided, through the combination of the below actions, with additional Common Equity Tier 1 capital of £1.5 billion, which will increase the Bank’s Common Equity Tier 1 capital ratio for the year end 2013 towards the upper end of previously announced guidance
    • £1,062 million to be generated in 2013 via the LME to holders of  the Bank’s subordinated capital securities, including the issue of up to £129 million of Group subordinated Note and up to £206 million of new Bank Tier 2 Notes
    • £373 million in Common Equity Tier 1 capital to be contributed in 2014 via The Group’s cash contribution of £333 million, and £40 million in Bank interest savings
    • LT2 Group investors underwriting £125m of new Common Equity Tier 1 capital as part of the LME
    • As a result, Bank’s Common Equity Tier 1 capital ratio for the end of 2013 to be towards the upper end of the previously announced guidance of "below 9% but above the regulatory minimum requirement"
  • The Group to be the largest single shareholder in the Bank following completion of the Plan, with 30% ownership
  • o No other single shareholder expected to have more than 9.9% ownership without regulatory approval
  • Co-operative Values and Ethics to be legally embedded in Bank’s constitution; Values and Ethics committee established as  committee of the Board with independent chairman
  • LME structured for different classes of bondholders and preference share holders
    • Lower Tier 2 holders to be offered combination of ordinary shares in the Bank, totalling 45% of the Bank’s equity and £100 million in new Bank Tier 2 Notes and the opportunity to subscribe for an additional 25% of the Bank’s equity for £125 million
    • Holders of 5.5555% perpetual subordinated bonds to be offered up to £106 million in new Bank Tier 2 Notes
    • Holders of 9.25% Preference Shares and 13% perpetual subordinated bonds – including a large number of retail investors – to be offered a choice between two subordinated Group Notes:
      • Final Repayment Notes of up to £129 million– paying a fixed rate of interest at 11% per annum on their principal amount, with the principal repaid at maturity in year 12; or
      • Instalment Repayment Notes – principal of notes repaid (without interest) in 12 equal instalments over 12 years;
  • An independent report by Canaccord Genuity as to the fairness of the offer, from a financial value perspective, to holders of the Preference Shares, 13% perpetual subordinated bonds and 5.5555% perpetual subordinated bonds has been commissioned and will be contained in the relevant prospectuses
  • LME now requires the support of the holders of all the Existing Securities, who must vote in a substantial majority in its favour. Further details set out in Annex I.
  • The Bank believes that, if the LME does not succeed, the only realistic alternative is resolution of the Bank under the UK Banking Act 2009 and believes that if the Bank were to enter into a bank insolvency or administration procedure following resolution, all holders of the Existing Securities would receive no recovery at all
  • Timetable for the Plan is set out in Annex  III of this announcement
  • Prospectuses for subordinated Group Notes and new Bank Tier 2 Notes to be published today
  • Bank strategic plan finalised and details published in Annex II of this announcement
    • Bank will be focused on retail and small and medium sized business customers
    • Separate division focused on management of non-core assets; non-core assets will be managed to achieve the most appropriate asset value or targeted for run down and exit
    • Four to five year turnaround plan to reduce the risk in the Bank, secure substantial long-term cost savings and restore core business to growth, building on the strength of the Bank’s brand and customer franchise
    • Intention to seek a Premium listing of the Bank in 2014

Euan Sutherland, Group Chief Executive of The Co-operative Group, said:

“Today we have taken a major step forward towards achieving our plan to secure the future of the Bank, putting in place an agreement with a number of our leading investors on a comprehensive Plan that will raise the necessary £1.5 billion of capital. The financial position of the Bank means that all stakeholders will have to make a contribution but in delivering this agreement we have worked hard to balance the distinct needs of all those affected.  The Co-operative Group is making a very significant contribution of £462 million. Key investors have also committed to put in new money and exchange their bonds predominantly for equity in the Bank.
 
“In addition, through the process, The Co-operative Group has made the interests of retail investors a key priority.  A significant proportion of the new funds invested by the Group are targeted at those investors. Whilst retail investors will, like all bondholders, suffer a loss in value, we believe these options secure the best possible outcome for them, in the circumstances.

“As a result, we are offering thousands of retail investors a choice between two alternatives:  to take an interest-paying Group bond with a lower annual payment but a final capital payment in 12 years’ time or, recognising some investors’ need for income, the chance to broadly match their current annual payment for the next 12 years without a final capital sum.

“We have consulted with the campaigners for retail investors and are pleased this Plan has engendered their support.

“On completion of the LME, The Co-operative Group will be the largest single shareholder in the Bank, with a 30% shareholding, and will have significant influence over how the Bank operates. We have enshrined the Values and Ethics that lie at the heart of The Co-operative Group into the new rules that govern the Bank. We have set up a Values and Ethics committee that will be chaired by a senior independent director. The Bank will be what its customers expect of it – a fair, responsible and trusted Bank that delivers great service to retail and small business customers, underpinned by the Values and Ethics of the Co-operative movement. 

“Now it is about delivery and ensuring that we build on this Plan. The Co-operative Group’s decision to make its significant contribution to the Plan was made balancing our ethical approach to business and our responsibility to the Bank and our other businesses. Our ability to support the financial future and business approach of the Bank was made possible because of our long-term view of the value that will be created in the four to five year transformation plan drawn up by the new management team.

“We are optimistic about the future; there is considerable potential to be realised across the Group and we are now well placed to restore the Co-operative brand to its rightful place at the heart of communities up and down Britain.”

Niall Booker, Chief Executive of Co-operative Bank, said:

“Today’s announcement marks a major step forward for The Co-operative Bank.  We are pleased that, if supported by our bondholders and Preference Share holders, this deal will secure the Bank’s recapitalisation. In these difficult circumstances we believe that it is the fairest outcome for our stakeholders, including customers, different classes of bondholders and Preference Share holders, colleagues and The Co-operative Group.

“The Bank is now focused on implementing our business plan which, following the capital raise, begins the process of strengthening the Bank, and returning it to profitability over time. We remain committed to co-operative Values and Ethics, and I am delighted that our future shareholders have agreed we can embed our commitment to Values and Ethics into our constitution. We now have the opportunity to renew our focus on serving the needs of our retail and small business customers. We will strive to make things simpler for our customers, removing unnecessary processes and reducing costs. We will also put greater rigour into our risk management and controls, ensuring our customers are dealt with respectfully, fairly and transparently.

“The Bank has already taken a number of steps to address the challenges it faces. It is clear, however, that there is a significant task ahead; we are only in the very early stages of turning the business around. The legacy issues we are working hard to overcome will continue to have an impact on the Bank for some time.

“With a strengthened management team, and a clear direction, we are confident we will become a stronger Bank, serving our customers in line with the Co-operative Values and Ethics which sit at the heart of why our customers choose to bank with us in the first place."

Richard Pym, Non-Executive Chairman of The Co-operative Bank, said:

“The Board of The Co-operative Bank welcomes the agreement of The Co-operative Group and the bondholders who have already supported this Plan. We believe the prospectuses to be published today set out why the revised Recapitalisation Plan is good for all stakeholders. We believe there are only two realistic outcomes for the Bank following the launch of the LME – either its successful recapitalisation or, if the LME fails, the resolution of the Bank. As a result, we are committed to engaging with bondholders and Preference Share holders over the coming weeks to explain the benefits of the deal in more detail, and would encourage them to support a deal which will provide the foundations for the long-term success of the Bank.”

Media enquiries

The Co-operative Group:    
Russ Brady – 07880 784442     

Tulchan Communications:
020 7353 4200
                                                      

Investor enquiries:

The Co-operative Bank:
0800 7312310

http://www.co-operative.coop/Bondholders/

There will be a presentation for investors at 9.30am on Tuesday 5 November 2013. A live webcast will be available at 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 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 and as adviser to the Bank to facilitate the. 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) 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 to facilitate the LME and as adviser to The Group. 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) 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.

Canaccord Genuity Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as  financial adviser to the Bank and is acting for no-one else in connection with the provision of an independent opinion on whether the LME is fair from a financial value perspective to (a) the holders of the 9.25% Preference Shares, (b) the holders of the 5.5555% Bonds and separately (c) the 13% Bonds  and will not be responsible to anyone other than the Bank for providing the protections afforded to clients of Canaccord Genuity Limited nor for providing advice in connection with the Exchange Offer or any other matter referred to herein.

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.

Greenhill & Co. International LLP, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively as financial adviser to the Bank and no one else in connection with the LME and will not regard any other person as its client in relation to the LME and will not be responsible to anyone other than the Bank for providing the protections afforded to its clients or for giving advice in relation to the LME, the contents of this announcement and the accompanying documents or any other transaction, arrangement or matter referred to herein or therein.

Further details on the Recapitalisation Plan (PDF 177 KB)