LONDON – The British lender Co-operative Bank announced plans on Monday to raise an additional £1.5 billion ($2.4 billion) to replenish a capital shortfall.
Under the terms of the deal, junior bondholders will be asked to swap their debt securities for shares in the Co-operative Bank. The agreement represents the first time that a so-called “bail in” of bondholders has been used to recapitalize a British bank since the financial crisis began.
The move contrasts with previous efforts by local banks to raise capital, including the multibillion-dollar state bailouts of lenders like the Royal Bank of Scotland and the Lloyds Banking Group.
By requiring bondholders to exchange their debt securities for shares, Co-operative Bank is trying to avoid turning to the British government for help.
The Co-operative Bank, whose credit rating was downgraded last month to junk status by Moody’s Investors Service because of questions over its capital reserves, said the agreement would increase its so-called common Tier 1 equity ratio, a measure of a firm’s ability to weather financial shocks, to 9 percent by the end of the year.
The Prudential Regulatory Authority, a British regulator, has called for all of the country’s banks to have a common Tier 1 equity ratio of at least 7 percent by the end of the year under the accountancy rules known as Basel III.
British lenders must raise a combined £25 billion by the end of the year to meet the capital shortfall. Regulators will announce details on Thursday of how much each bank must raise by the end of the year.
The Co-operative Bank said on Monday that it planned to raise £1 billion this year through the bondholder swap, and increase its reserves by an additional £500 million next year.
“This announcement is good news for the Co-operative Group, the Co-operative Bank, its customers,” Euan Sutherland, chief executive of the Co-operative Group, said in a statement. “This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank.”
As part of the move to raise capital, the Co-operative Bank also plans to sell its general insurance unit. This year, the bank sold its life insurance and asset management businesses to the British pension company Royal London for around £220 million.
The Co-operative Bank’s financial difficulties stem from a mistimed acquisition in 2009 of a local rival, Britannia Building Society, that left the bank with a large pool of delinquent commercial real estate loans.
The bank also ran into trouble this year when its plan to buy part of the Lloyds Banking Group’s branch network collapsed. The move was an effort to increase its capital base, while also expanding across Britain to compete with larger lenders like Barclays and HSBC.
This post has been revised to reflect the following correction:
Correction: June 17, 2013
An earlier headline with this article misspelled the name of the bank. It is Co-operative Bank, not Co-operaritive Bank. The article also misspelled a company name. It is Moody’s Investors Service, not Moody’s Investor Services.
Article source: http://dealbook.nytimes.com/2013/06/17/co-operaritive-bank-turns-to-bondholders-to-fill-capital-shortfall/?partner=rss&emc=rss
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