Banking watchdogs are applying pressure to the Co-op Group to back a £700m rescue of the bank which carries its name amid ongoing tensions about the restructuring of their joint £10bn pension scheme.
Sky News has learnt that the Prudential Regulation Authority (PRA) is urging the mutual to relent in its demands that a group of US hedge funds make substantial additional payments to secure its support for a fresh bailout of the lender.
The efforts of the PRA, which is a unit of the Bank of England, are understood to have intensified in recent days, even as the Co-operative Bank has expressed optimism that it is close to finalising a rescue package.
Sources said that the PRA was applying pressure to all of the participants in the talks to compromise, not only the Co-op Group.
The banking regulator is concerned about the impact on the viability of the Bank – which has four million customers – of the impasse between the Co-op Group and the hedge funds.
Insiders said on Tuesday that the Group wants the hedge funds – which hold most of the Bank’s bonds and shares – to make an additional payment said to be worth tens of millions of pounds to restructure a relationship agreement between the two Co-op entities.
The proceeds of such a payment have been earmarked by the Group to go into the Pace pension scheme, according to a source.
The position of the PRA has placed the Co-op Group in an awkward position, because its desire to see more funds diverted to protecting pensioners has received informal support from the Pensions Regulator.
“The Group is caught between two regulators with conflicting agendas,” said one observer.
Under the plans being drawn up by the bondholders, the Pace scheme would be sectionalised, leaving each side of the Co-op responsible only for its own employees’ retirement savings.
The current arrangement includes a ‘last man standing’ provision which means that each is liable for the whole scheme if the other side goes bust.
In total, Pace counts nearly 90,000 Co-op Group and Bank workers as members.
The Group pays £20m into the scheme each year, with the Bank contributing £5m, with a new triennial valuation of the scheme deficit due to take place this year.
The pension trustees have been insisting that Co-op Bank bondholders commit to funding their standalone scheme over a multi-year period.
Insiders said that the Bank, bondholders and trustees were now “broadly agreed” on the structure of a deal, although the Co-op Group has ruled out providing new funds to the pension scheme.
The bondholders have offered to inject £62.5m in cash over five years to eliminate an actuarial deficit, with the scheme gaining rights to Co-op Bank assets in the event of a future crisis.
In a statement issued on Monday, the Bank said it was at an “advanced” stage of talks about the Pace separation – a characterisation which some people close to the talks described as “unrealistic”.
A spokesman for the Pensions Regulator said:”We are working closely with the employer and trustees; however, it would not be appropriate for us to comment further at this stage.”
Employers can seek clearance from the pensions watchdog ahead of major corporate deals, although such a move would be voluntary rather than mandatory.
The PRA declined to comment on its involvement in the talks.
The attempts to resolve the stalemate come as a fifth hedge fund – Anchorage Capital Group – joined the consortium of Wall Street financiers seeking to finalise the rescue of the Co-op Bank.
“The (bondholder) proposal, if implemented, would enable the Bank to meet the longer-term? capital requirements applicable to all UK banks and to continue as a standalone entity,” the lender said on Monday.
“The proposal would also safeguard the Bank’s values and ethics.”
The Co-op Bank also said it had been informed by banking regulators at the weekend that its long-term capital requirements would be lower than previously expected.
It added that it saw the potential to pay a dividend to shareholders in 2021 if its business plan was delivered over the coming years.
Monday’s statement raised hopes that a deal to save the Co-op Bank – and avoid it becoming a test-case for the Bank of England’s powers to wind down failing lenders – can be struck well before a September deadline for repayment of a £400m bond.
The Co-op Group, which is one of the UK’s biggest food retailers and funeral care providers, would see its stake in the Bank slashed to less than 5% under the bondholders’ plan.
The scramble to rescue the Co-op Bank has been triggered by its need to find more than £700m of new capital.
In March, the Co-op Bank said it would require up to £750m of new top quality capital, the majority of which would be generated by exchanging some of its debt for equity – a process known as a liability management exercise.
The remainder would come from issuing new shares.
The total capital requirement has been marginally reduced by the regulator’s revised guidance to the Co-op Bank, a source said.
The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its original £1.5bn bailout in 2013.
The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.
The Co-op Bank’s balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.
Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.
The Group and Bank declined to comment.
Source: SKY News