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The Fixed Interest Sector – The Co-op Bank suspends its Bonds.


CliveH

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This is a classic example of a bank selling its Corporate Bonds as if they are a fixed interest account. It seems that the Co-op did this to some of its members and now they could lose a substantial amount.

 

When an organisation wants to borrow money one option is that they go to the public and promise to pay interest and pay back the capital after a set period.

 

When a commercial organisation does this it is called issuing a Corporate Bond, and when a Government does this it is called a Government Bond or in the UK a Gilt.

 

If the organization is sound financially then this works well – but if the organization gets into difficulty then it can default and stop paying the interest AND not pay back the capital lent to it.

 

The Co-op Bank is now in that unfortunate position in that it does not have enough funds to meet its liabilities and so has asked for the Corporate Bonds that it has previously issued to be suspended.

 

This is a salutary lesson to all those that think this sector is foolproof. It isn’t.

 

 

……………………………..

 

 

This from one of the delicate shades of puce.

 

Beleaguered Co-op suspends bonds after recap plans fail

 

Co-operative Group set to lose control of bank after it confirmed it will be forced to revise recapitalisation plans.

 

By Michael Trudeau | Published 16:17 | 0 comments

 

Co-operative Bank has suspended a number of listed corporate bonds following an announcement earlier today (21 October) that it will be forced to revise its recapitalisation plans amid speculation the Co-operative Group could be set to lose overall control of the group.

 

According to a statement on the London Stock Exchange, the bank requested the suspension following the announcement by The Co-Operative Group Limited that it could have to alter its plans to recapitalise the beleagured bank.

 

An earlier statement from the bank published today (21 October) revealed that the bank was “engaging with different bondholder constituencies and seeking to balance the requirements and expectations of these parties”.

 

The statement added that many elements of the beleaguered bank’s recapitalisation plan would be “materially different” to an original outline in June designed to raise £500m towards the bank’s capital shortfall of £1.5bn, by swapping retail bond holdings into shares in a restructured bank.

 

The original proposals would have seen the Co-Operative Group contribute £1bn to the recapitalisation plans in return for a 70 per cent stake in the bank.

 

Reports have claimed that resistance of US-based hedge funds to the recapitalisation has prevailed, with the Co-op now having to reconsider how it will meet the £1.5bn capital shortfall and being likely to be forced to cede a shareholding of more than 50 per cent.

 

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said the suspension highlighted the risks of investing in corporate bonds for retail investors and highlighted the potential virtues of investing in bonds exclusively through funds.

 

“Investing in individual corporate bonds has its risks. It is important investors are fully aware of the risks before they consider buying shares or bonds in any company.

 

“Most investors should consider gaining exposure to corporate bonds via a bond fund. In addition to obtaining access to an experienced manager, investors also benefit from diversification.”

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That last sentence is wise advice indeed.

 

 

 

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Guest Peter James
1footinthegrave - 2013-10-22 9:28 PM

 

I think you should run for chancellor. :-S

 

 

I suspect Clive doesn't have the required qualifications to get the job.

Osborne backed Cameron for Party Leader and organized his leadership campaign.

Why else is he Chancellor?

Its certainly not his financial acumen is it?

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Guest Had Enough

You lot are very cruel. This is a very serious article from 'THE PINKS' and for you to treat it as a big joke is just unfair. Give the man a chance please. ;-) This forum is obviously very important for Clive's self respect and self validation and to mock is simply not the done thing. Now stop this unkind behaviour and treat his threads from 'THE PINKS' with the respect they deserve! (lol) (lol)

 

Far too many of his rivetting articles from 'THE PINKS' have been totally ignored and I'm determined to see that it doesn't happen again. ;-)

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  • 2 weeks later...

So it now seems the Bondholders either accept the deal on offer from the two US Hedge Funds or get nothing. If the Bank goes to the UK resolution process they get nothing. Not much of a choice!

 

It seems that members of the Co-op bank were offered Co-op Corporate Bonds by the bank in the past.

 

I suggest those investors check the suitability letters received from the Bank and seek independent advice as to their options.

 

 

 

 

 

 

 

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This from one of the "delicate shades of puce" (lol)

 

"Co-operative Bank has this morning confirmed the payouts retail investors can expect for their preference shares as part of a finalised re-capitalisation plan that will see its mutual parent cede a majority 70 per cent holding.

 

According to a detailed announcement published this morning (4 November), share and bond holders will receive payouts or share conversions based on where they sit within the bank’s capital structure.

 

 

Holders of 9.25 per cent preference shares and 13 per cent perpetual subordinated bonds - which include a number of retail investors - are to be offered a choice between a ‘final repayment note’ that will pay a lower rate of interest per year with the principal sum repaid at maturity, or an ‘instalment repayment note’ that will repay just the principal sum in equal annual installments.

 

According to the bank, the final repayment notes will pay a fixed rate of 11 per cent per annum with the principal repaid at maturity in year 12, while the instalment note will simply pay the principal sum over 12 years. "

 

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Considering the mess the bank is in - not a bad set of options.

 

 

 

 

 

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Guest Peter James
I guess its as much a lesson in how much damage the Government has done in forcing down interest rates below the rate of inflation for so long. It isn't just damaging to savers who have done the right thing by working and saving. Its disastrous to decent financial institutions like the Co-op that are committed to paying fixed interest on their loans, or decent Building Societies that have loaned out money on tracker mortgages. The only mistake they made was, like the rest of us lets be honest about it, not to forsee in advance the extremes the Government would go to keep down interest rates and keep up asset prices.
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It certainly does not help the small specialist "niche" lenders Peter.

 

However - I am reasonably confident that the Co-op will survive because of its ethical stance. It seems to be this that is making it attractive.

 

It may just be words but it does seem that those that have formulated the rescue package are mindful of this banks stance and how to dilute that could see its customers leave. And without its core loyal customers it is frankly - nothing.

 

It speaks volumes that the deal offered to investors is still attractive.

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The "muddy waters" of exactly what went on re the Co-op Bank are clearing somewhat:-

 

 

"MPs ‘encouraged’ expansion of Co-op Bank says Flowers

 

Leading political figures had been “very encouraging” of the Co-operative Bank’s ill-fated expansion plans, Paul Flowers has claimed.

 

By Kevin White | Published 15:50

 

 

 

Giving evidence today (6 November) to MPs on the Treasury select committee, Rev Flowers, the former chairman of the Co-operative Bank between April 2010 and June 2013, said the Treasury, including the then economic secretary Ed Balls, had been “supportive of the merger between the Co-op Bank and Britannia Building Society”.

 

Both the business secretary Vince Cable and the former financial secretary to the Treasury Mark Hoban made “positive noises” regarding Project Verde - the collapsed plan to buy 632 Lloyds Banking Group branches.

 

Rev Flowers said Mr Hoban was in regular contact with former Co-operative Group chairman Peter Marks over Verde, and claimed there “was a great deal of political goodwill to succeed” in the process.

 

Rev Flowers’ testimony was in stark contrast to other former Co-operative Bank and Co-operative Group executives, who denied any political interference in either the Britannia merger or Project Verde.

 

He said there was very clear encouragement to expand from successive governments, to such an extent that he was approached by former Northern Ireland secretary Owen Patterson at the Conservative Party conference in 2010 to discuss whether the Co-op could step in to buy the ailing Presbyterian Society.

 

He said: “There was a £100bn black hole on its balance sheet, and we told him it was a basket case”.

 

Rev Flowers added that deputy governor of the Bank of England Andrew Bailey, had also been enthusiastic about Verde, while representatives from the Co-op Bank met weekly with the FSA in the run-up to the bank’s eventual departure from the Project Verde process.

 

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Damn short memories these politicians have.

 

Must be an awful burden :-S

 

 

 

 

 

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