October 23, 2013 / 2:18 PM / 4 years ago

Fitch: Co-operative Bank's Senior Bondholders Intact but Uncertainties Rise

(The following statement was released by the rating agency) LONDON, October 23 (Fitch) Fitch Ratings says senior bondholders in The Co-operative Bank (BB-/Rating Watch Evolving) have not had to take any losses under an alternative capital raising plan recently agreed by the bank's owner, the Co-operative Group. However, both the plan and operating performance year to date have raised uncertainty around the bank's strategy, franchise and capital buffer levels. Under the new plan holders of subordinated (lower Tier 2) debt, amounting to around GBP930m, will convert their debt holdings into a 70% equity stake in the bank. This will reduce the bank's liabilities and restore capital by the same amount. The Co-operative Group will remain the single largest shareholder with a 30% holding. There is also a possibility that an exchange offer is made to holders of the bank's upper Tier 2 and preference shares; the potential loss rate for these cannot be established until further details of the plan are announced. The change in ownership is substantially different than previously envisaged and it may result in strategic changes that are difficult to predict at this stage. Fitch downgraded the bank's Issuer Default Rating to 'BB-' in June 2013 to reflect the EUR1.5bn additional capital requirements requested by the UK regulator to restore the bank to a stable position. Higher-than-expected loan impairments, further write-downs of IT systems and additional conduct provisions announced since H113 may reduce the capital buffers raised under the alternative recapitalisation plan. In its June 2013 rating action, Fitch referred to an upside to the rating based on an expectation that the bank would meet at least a 9% common equity Tier 1 ratio on a fully loaded Basel III basis by end-2013 with further increases in future years. Fitch will look to review the likely capital buffers and resolve the Rating Watch on announcement of the details of the plan. A targeted deleveraging plan could mitigate some of the capital attrition, but strategy around this is vague at this stage. Our June rating announcement also assumed that the bank would stabilise its franchise, with new management setting down a sustainable, credible longer-term strategic plan. Ownership changes announced this week create further uncertainty around these drivers. Although the Co-operative Group remains the single largest shareholder, having the majority of the bank owned by institutional investors may further damage its core retail franchise as an advertised co-operatively-run 'ethical' bank. Underlying operating profitability is already under pressure and franchise erosion could push the bank into a structural loss-making position without a clear strategy to prevent this. Contact: Contact: Denzil De Bie Director +44 20 3530 1592 Fitch Ratings Limited 30 North Colonnade London E14 5GN Christopher Keeling Analyst +44 20 3530 1494 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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