#629

JonWBWB
Participant

If I could recommend Mark’s post several hundred million times – one for each pound of value transferred from the hedge funds to the retail bond holders – I would. An amazing outcome.

I think the coupon cost of the 2017 Senior, relative to the cost of (mainly retail) deposits, is just a side story in all this. If anything Co-op Bank probably has too much in deposits as it is (more on this later). Liquidity isn’t the issue, it’s the lack of capital available below the depositors that the PRA will be concerned with.

Co-op bank has no CoCo’s, the equity is unlisted and valued at around GBP 1 per share. Co-op bank is also firmly shut out of primary issuance in the capital markets at the moment.

The game changer from 2013 is that senior bonds are now subordinated to depositors. If Co-op bank could get a scheme of arrangement through for LT2 in 2013, then I think it highly likely they would be able to for the Senior in 2017 sometime before they mature (with a suitable warning from the PRA).

For Co-op bank, from the position of the PRA, the GBP 400M of 2017 Senior forms part of the capital that could be bailed in before depositors are bailed in. Moreover, both Tier 2 and Senior are essentially the same in terms of bail in. Both are gone concern capital, both have a contractual obligation to pay interest and mandatory maturity dates, both are susceptible to restructuring on a capital shortfall and the threat of resolution. It is very handy for the PRA to know how much of the bonds are outstanding. The PRA could adjust the capital requirements in 2017 to ensure that all the bonds are needed (Tier 2 and Senior), but none of the depositors. Maybe I’m just too cynical, but I think the PRA sees all bondholders as fair game, but depositors are still to be protected, if at all possible.

Virtually all corporate depositors have fled the Co-op bank. From the 2015 full year accounts (see page 18 from: https://www.co-operativebank.co.uk/assets/pdf/bank/investorrelations/financialresults/2015-Annual-Report-and-Accounts.pdf), it’s something like GBP 2.9bn out of GBP 22.8bn of deposits held by corporates, just 12-13% of the total. That implies that any bail-in of depositors – let’s not forget there is a minimum requirement of 8% of assets to be bailed in before taxpayers can provide any assistance at all under the new rules – is going to hit mainly retail deposit holders. I’d expect nearly all of them to fall under the Financial Services Compensation Scheme (FSCS) limit, so if it came to that, it would be a real mess. Maybe the PRA (and Co-op bank) are trying to ensure the full 8% of liabilities is for bond holders only with a gradual retreat of depositors. Form a quick look, I think deposits would need to get down to around GBP 11bn or so for the full 8% to be taken by bondholders.

If Co-op needs more capital then I see it coming from Tier 2 and Senior, rather than from another equity raise, given the price of equity. There is the potential for deleveraging, but operational losses may well continue, coupled with IT spend from late delivery which has to to be a real risk, given the overrun to date.

I just can’t see the PRA allowing that GBP 400M out the door in September 2017 thereby reducing the bail-in capital before depositors take a hit, if required, further down the line, especially when the bank hasn’t kept on track to deliver it’s original plan.

I think they will be looking for Co-op Bank to get away a primary issuance of senior for at least GBP 400M to replace it. It seems to me that it is unlikely Co-op Bank will be able to get a new senior bond away given the outlook.

Invesco holds 23.31% of the Co-op 2017 seniors – according to Bloomberg (as of last week):

XS0542823892 HDS

Invesco have also been steadily increasing their stake since 2013:

XS0542823892 HDS 2013

XS0542823892 HDS 2014

XS0542823892 HDS 2015

Invesco were also one of the biggest ordinary shareholders in Co-op bank in 2014. They still hold equity in the Sterling Bond Fund. See page 4:

https://www.invescoperpetual.co.uk/static/ig/fund/factsheet/ip/be2cf671b5920410VgnVCM100000c1f1bf0aRCRD/Invesco-Funds-Series-6-Interim-Report

It did make me wonder where prices would be for the 2017 senior if Invesco hadn’t been buying since 2013.

I don’t know if Invesco have sold down any equity at all, but for any big holder of the 2017 Senior, I’d suggest you pull the shareholder register to check. If Invesco hold significant equity in addition to the 2017 senior bonds (and subordinated), then which class do they favour and why? It seems possible that their interests may not align well with any single class of investors.

The risk of a debt restructuring, be it some form of restructured bond – or conversion to equity – is just too high for me, given the price on offer. That is why I sold at 92.3p last week.