June 15, 2017 / 12:30 PM / 6 months ago

Co-op sub debt holders set for £27m coupon payments

LONDON, June 15 (IFR) - Holders of Co-operative bank’s subordinated debt are set to receive some £27m of coupon payments in the coming weeks despite the troubled UK lender struggling to find a buyer for its business.

A spokesperson for the bank confirmed that it will pay a quarterly coupon of £5.67m on a 11% Tier 2 due in December 2023 on June 20 and an annual coupon of £21.25m on a 8.5% July 2025 Tier 2 at the beginning of next month.

The UK lender put itself up for sale in February after failing to meet regulatory capital requirements. But it has had little success in finding a purchaser despite reported interest from various parties.

The outcome for Co-op’s subordinated debt holders stands in sharp contrast to the fate of investors in Banco Popular, where the Additional Tier 1 instruments were wiped out, the Tier 2 debt converted to new equity and the bank sold for €1.

“Should they be allowed to pay? No,” said one syndicate banker. “But it’s Tier 2, if you don’t pay, you’re in default. So you keep going until someone says no, you can’t pay.”

The UK regulator has taken harsh action against subordinated debt holders in the past. When Bradford & Bingley was nationalised during the financial crisis, the transfer order allowed for coupons on its debt to be skipped, avoiding the event being declared a default.

Market participants are now speculating as to what could push Co-op over the edge given that the regulator has been patient.

“There is no direct read-across [from Popular] for Co-op. It doesn’t have a liquidity issue, it has a cost issue, which is eroding capital at a fairly rapid rate,” another banker said.

“It’s a completely different set of circumstances, though you can’t discount it might have the same end. They absolutely do have to address it, but I don’t see the same liquidity and confidence pressure.”

Unlike bonds in Popular, however, Co-op’s Tier 2s are pricing in a much greater risk of being wiped out. Popular Tier 2s were quoted in the high 70s the evening before the bank was resolved.

Co-op’s 11% deal was in the mid 30s on Thursday and the 8.5% issue in the low 30s, according to Tradeweb prices.

“I think the PRA is actually very much ready and comfortable with going in and resolving the Co-op Bank,” a bond investor said.

“I could be wrong, but that’s my initial take. I personally would not be surprised at all to see the resolution authority coming in and resolving the bank, if the current stakeholders are not able to bring fresh capital.”

The Bank of England declined to comment. (Reporting by Helene Durand, Editing by Julian Baker and Sudip Roy)

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