Investors in The Co-operative Bank are very unhappy with the principles of the outline for financial restructuring proposed last month. While co-operative activists are disillusioned that the Bank’s problems are leading towards a partial demutualisation, thousands of bondholders are opposed to potentially bearing losses through their debt being converted into shares.
There are ten classes of securities issued by the former Britannia Building Society and by The Co-operative Bank prior to the nil cost acquisition of Britannia that are affected by the proposal, totalling £1.3bn. These are £275m of subordinated notes, due to mature in 2021, paying 9.25%; £235m of subordinated notes, maturing in 2022, paying 7.875%; another £200m of subordinated notes, maturing in 2024 and paying 5.75%; £200m of perpetual subordinated bonds, paying 5.5555%; £150m of subordinated notes, maturing in 2033 and paying 5.75%; £110m of perpetual subordinated bonds, paying 13%; £60m of preference shares, paying 9.25%; £37.8m of subordinated notes, maturing in 2019, paying 5.875%; €35m (£30m) of floating rate subordinated notes; and £8.7m of subordinated notes maturing in 2021, which use a mix of fixed and floating rates.
The securities shown as perpetual subordinated bonds were originally issued by Britannia as Permanent Interest Bearing Shares. At the time PIBS were widely regarded as safe investments and were often recommended by financial advisors. As recently as April this year, Interactive Investor explained: “PIBS are high-yielding hybrid bonds issued by building societies. Those societies that demutualised turned their PIBS into subordinated bonds in the demutualised lenders. The sector was given a bad name by the collapse of Northern Rock and Bradford & Bingley among others, but the overwhelming majority of issues – particularly among PIBS – have proved safe.”
It is this perception of safety that has helped stir some of the anger amongst investors whose holdings of PIBS have turned sour. This is not only true of Britannia, Northern Rock and Bradford & Bingley. It was also true of the PIBS issued by the West Bromwich Building Society, whose holders took a hit through a big cut in interest paid in order to protect the society’s future. Today, West Bromwich’s PIBS are valued at only 19% of their issue price.
There was also unhappiness regarding the PIBS issued by the former Bristol & West Building Society, which was acquired by the Bank of Ireland. As part of the recapitalisation and restructuring of the Bank of Ireland, it was proposed by the Irish government that, as part of a rescue, the PIBS become worthless. There was a strong campaign against this, which was eventually successful.
The person who represented small private investors holding the Bristol & West PIBS, which became Bank of Ireland perpetual subordinated bonds, was Mark Taber of Fixed Income Investments. At the time he represented about 500 Bristol & West investors, out of the total affected of 5,000 or so. In the last few days he has been contacted by more than a thousand small investors in The Co-operative Bank.
Although the Bank has estimated there are about 7,000 investors affected by its proposal to restructure its debts, Taber believes the figure is around 15,000 – mostly small retail investors and many of whom are pensioners. He suggests the Co-op has failed to recognise many investors hold bonds through nominee accounts, who are not shown individually in the Bank’s register of bondholders.
Taber has been approached by investors holding three classes of bonds. These are the two sets of perpetual subordinated bonds issued as PIBS by Britannia, plus those who bought Co-operative Bank preference shares.
“These were always popular with pensioners for income and with retail investors,” Taber told the News. These investors now rely on their payments on the bonds, in some cases to help with paying residential care home costs. Many have contacted Taber because of his success in getting the Bank of Ireland and the Irish government to abandon their plans to wipe out the former PIBS.
“People are contacting us because we were successful last time and it has just gone mad,” says Taber. “About 1,200 investors have got in touch already in two weeks. That is amazing in that short time. You can guarantee there are many, many times more people who are completely ignorant of what is going on. Many people have held these investments since the 1990s and are not capable of keeping in touch with what is happening. Many are in old people’s homes.”
Taber says the proposal for The Co-operative Bank restructuring is potentially a “much bigger issue” than that affecting the Bristol & West investors, with many more investors affected. “I am getting a campaign started and have got lawyers involved,” explains Taber. “We are looking for legal angles.” In support of this putative campaign, Taber has established a blog on his website – http://www.fixedincomeinvestments.org.uk/fixed-interest-blog/troubleattheco-op – and a campaign library.
Taber believes that the proposals from the Co-op fail the fairness test, with difficulties increased by the lack of detail in the outline restructuring proposal. It will only be in October that bondholders will know the full details. He argues that The Co-operative Group should increase its financial support for the Bank – a call rejected by the Group (see this column in the last issue), which argues that it is placing substantial additional funding into the Bank.
Taber argues that it was “the Group that made the decisions” and so has “responsibility for causing this situation to arise”. He also suggests – as has the Moody’s credit ratings agency – that past accounts failed to adequately reflect the financial situation of the Bank. Moody’s implied that the Bank was too slow in impairing its poor quality loans inherited from Britannia.
The Bank recognises that some investors are being placed in financial difficulties and is offering to make financial advice available to assist small investors who rely on their income from bonds. Taber says this is not enough. “We are trying to push them on financial advice,” he says. “Many of the pensioners need financial advice now, not in four months time.”
However, the Bank says this view is based on a misunderstanding and that it intends to provide financial advisory support in advance of the details of the financial restructuring being published in October. In addition, the Bank intends to establish a micro website containing important financial information for investors. Moreover, stresses the Bank, no payments to bondholders have been missed and only one payment is scheduled between now and October, which is due at the end of July.
No decision had been taken at the time of writing on whether that due payment will be met or suspended, but if it is to be suspended a decision will have been taken prior to publication of this issue of the News. The Bank adds that if the payment is not made, it will be deferred and not defaulted on.
It is clear that Mark Taber intends to adopt high profile campaign tactics. “I am in touch with the Treasury Select Committee,” he explains. “[The Conservative MP] Jesse Norman on the Select Committee is being very supportive.
“The Co-op Group should follow through on its pledges to engage with retail investors and come up with something more suitable. They should follow through on the financial advice. And they need to get together with the PRA [the Prudential Regulation Authority, the regulator] to find a more pragmatic and ethical solution. It’s not fair.”
The fact that financial problems were not clear from the Bank’s accounts before this year and the failure of the PRA to flag issues in the Bank’s capital structure – despite it now emerging that regulators had concerns going back for the last two years or so – demonstrates there has been a “false market in [the Bank’s] bonds for several years,” argues Taber. “People have been moving investments from other banks they thought were more risky because of this false market.”
Moreover, Taber suggests, the PRA has been too tough on the Bank, requiring levels of capital that are appropriate for a bank that is systemically essentially – which, to be blunt, the Co-op is not, because of its comparatively small size. “The PRA could be more flexible here,” he says. “The PRA has caused this impasse.” Taber suggests the best option would be for the PRA to be more pragmatic and accept a lower level of capitalisation, which would then permit the Bank and bondholders to compromise on the restructuring.
However, any solution will be difficult to achieve – not least because the small investors are just one group taking action. According to the Financial Times, there are another two or three groups considering legal action against the likely terms of the financial restructuring. It is rumoured that one group of UK investors is being assembled by the Association of British Insurers, which gave us a firm and repeated ‘no comment’, even when we asked if it would confirm or deny the suggestion. The FT also suggested that US law firms Brown Rudnick – which has previously worked with Mark Taber – and Bingham McCutchen were talking with investors over possible legal action. Both firms failed to respond to our enquiries.
With the details of the financial restructuring not due until October and with several thousand investors nurturing both losses and grievances, we can expect The Co-operative Bank to remain in the headlines for all the wrong reasons for many months more.