Co-Op Bank said to head for debt-for-equity swap

Co-Operative Bank, the UK lender that put itself up for sale amid a capital shortfall, is coming closer to forcing bondholders to swap debt into equity and selling shares as it runs out of options to bolster its financial strength, according to people familiar with the matter.The Manchester, England-based lender is seeking an agreement with bondholders including US hedge funds Silver Point Capital and GoldenTree Asset Management within weeks to raise as much as £750mn ($963mn), said the people who asked not to be identified because the details are private. Co-Op Bank is also in talks with a potential bidder for the company, though a so-called liability management exercise without a sale is the most likely option, the people added.The bank has been attempting a turnaround since 2013, when regulators identified a capital shortfall, its parent company ceded control to bondholders and its former chairman resigned following drug allegations in a British newspaper. Failure to find a buyer or reach a deal to inject new capital could lead the Bank of England to place the lender into resolution, leading to steep losses for debt investors and a fire sale of its assets. Such a step would be the first major test of such BoE powers under rules designed to end too-big-to-fail taxpayer bailouts.Chief executive officer Liam Coleman may seek a deal before the bank is required to pay about £26mn in coupon payments due on June 20 and July 1 for two junior notes, said one of the people. The bank also has £400mn of senior notes that mature in September, the people added.Co-Op Bank’s option to raise as much as £750mn from a debt-for-equity swap and the sale of new shares is far from straightforward. A group of leading bondholders has submitted a proposal for less than that amount, according to people familiar with the matter. The bank may need investors to commit further funds or gain approval from the UK’s Prudential Regulation Authority to raise less money, they added.Co-Op Bank has about £22bn of customer deposits, £19bn of loans, and 4mn customers. The lender reported a pretax loss for 2016 of £477mn, compared with a £611mn loss a year earlier. Its common equity Tier 1 capital ratio, a measure of financial strength, fell to 11% from 15.5%.British lenders including CYBG, the owner of the Clydesdale and Yorkshire Bank brands, and Richard Branson’s Virgin Money Holdings UK have shown interest in the bank, people familiar with the matter have said. While Co-Op Bank has previously said it got “a number of non-binding proposals from strategic and financial parties,” it’s now only in talks with one bidder, two of the people said.Buyers are concerned about integrating Co-Op Bank’s technology platform, although the heads of small UK lenders from OneSavings Bank to Secure Trust Bank have said they would consider purchasing assets if the lender was resolved by the BoE. That’s “one of the more likely conclusions that could arise,” according to Paragon Group chief executive officer Nigel Terrington, who said he was eyeing a breakup earlier this month.BlueMountain Capital Management, Andrew Feldstein’s $22bn investment firm, could invest, according to a person familiar with the matter. Ted Smith, an external spokesman for the New York-based fund, declined to immediately comment.Alongside its US hedge-fund owners led by Silver Point, the bank remains about 20% owned by its former parent, Co-Operative Group, the operator of businesses from funeral care to supermarkets. Co-Op Group has written down the value of its stake in the bank to zero from £185mn a year ago.