MSE News: Co-operative Bank: Savers' cash safe as rescue plan revealed

Former_MSE_Darryl

"A rescue plan for the troubled Co-operative Bank has been revealed today as it tries to fill a £1.5 billion hole in its finances..."

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Co-operative Bank: Savers' cash safe as rescue plan revealed



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gadgetmind

"securities paying dividends of up to 13% a year" - ah yes, that wonderful phrase "up to".

That's the coupon at par and many will have bought the PIBS and prefs at well over par. They will have bought these securities in the much-trusted Co-op to generate safe retirement income with yields of close to 6% in many cases. This income will now cease and their capital will have lost well over 50% of its value.

Meanwhile, the senior bonds held by the big guys will be impacted far less.

However, let's see how the LME is worded.

mystic_trev

Not so great if you're holding their PIB's !

Co-op Bank unveils £1.5bn rescue plan which 'could see 5,000 investors lose 30% of their cash'

http://www.thisismoney.co.uk/money/news/article-2342570/Co-op-Banks-5-000-PIBs-investors-lose-30-cash-rescue-deal.html

alanq

gadgetmind wrote: »

However, let's see how the LME is worded.

LME? The online financial glossary I looked at only gives London Metal Exchange.

bowlhead99

alanq wrote: »

LME? The online financial glossary I looked at only gives London Metal Exchange.

Liability Management Exercise. Basically they will offer holders of existing bank debt, some new debt in the wider (and well capitalised) Co-op group and some equity in the bank alongside the parent group.

As with any bank there are different tiers of debt at the moment, and if you hold the senior debt you're more likely to get new Co Op debt, while if you hold the junior debt or pref shares, you'll be offered a greater proportion of equity instead - which is what can happen when you invest in something more risky and inherently less secure. The debt and prefs if redeemed at current prices means the company kills it off at less than the par value that it was previously sitting in their balance sheet at.

I thought it interesting that they said they were looking into obtaining some free independent financial advice for small retail holders of the securities who presumably aren't as sophisticated and might not understand what the tender means for them. I wonder what if any type of service they will provide in that regard.

Still, if you don't understand pibs and psbs and bank prefs, you shouldn't have been holding any meaningful chunks of such securities in single banks when you saw a bunch of banks go under in the financial crisis. They will certainly be living up to their ethical reputation if they do source some independent free advice for such people.

MoneySaverLog

I would not want to be holding any of their James Bonds today

gadgetmind

Another article on the subject.

http://www.telegraph.co.uk/finance/personalfinance/comment/10124889/Will-Co-op-customers-fall-out-with-a-newly-listed-bank.html

pqrdef

bowlhead99 wrote: »

The debt and prefs if redeemed at current prices means the company kills it off at less than the par value that it was previously sitting in their balance sheet at.

So they fix the balance sheet by writing off undated debt that they were never going to redeem anyway?

I'm missing something here. If these things are on the balance sheet at par, they could swap £100 of stock at 13% for £10 at 130% and 90% of the "liability" would evaporate, although they'd still be on the hook for the same interest.

gadgetmind

Part of the problem is that Basel 3 redefined what was and wasn't loss adsorbing capital.

http://en.wikipedia.org/wiki/Tier_1_capital

Preference shares, PIBS, and the like cause a lot of complexity and the banks need to use LMEs etc. to do anything to them as they were sold as safe investments with prospectus rules to back this up.

As for redeeming them, banks have to show the cost of repurchasing all their issued capital at market rates (not par!) on their balance sheets. This is why some banks found their balance sheets suffering as they recovered!

As for the coupons, they actually matter very little in the grand scheme of things as the balance sheet is more important to regulators than cash flow.

sabretoothtigger

MoneySaverLog wrote: »

I would not want to be holding any of their James Bonds today

License to kill returns

atypical

gadgetmind wrote: »

As for redeeming them, banks have to show the cost of repurchasing all their issued capital at market rates (not par!) on their balance sheets. This is why some banks found their balance sheets suffering as they recovered!

Does that mean the opposite is also true i.e. balance sheets strengthen as a company's health declines? Due to liabilities reducing as the value of their debt declines if I haven't misunderstood.