In June this year, we reported* on the proposals put forward by the Co-operative Bank (the “Bank”) and its parent company, the Co-operative Group (the “Group”), to deal with a serious capital deficiency in the Bank.  Since June there have been lengthy negotiations between the Bank and the holders of its debt securities, as a result of which the Bank and the Group have modified the proposals considerably.
Under the new proposals, holders of the Bank’s preference shares and debt securities will receive new securities as follows:

Preference Shares and certain perpetual debt securities Debt securities issued by the Group (repayable either in instalments or in 2025)
Other perpetual debt securities Tier 2 bonds issued by the Bank
Dated debt securities Ordinary shares in the Bank (amounting to some 70% of the equity in the Bank) and Tier 2 securities issued by the Bank

In each case, the exchange ratio is set at a level which substantially reduces the Banks’ liabilities.
In addition, the existing shares in the Bank held by the Group will effectively be written off, and the Group will contribute new capital in return for new shares in the Bank.  The Group’s interest in the Bank will be reduced to around 30% of the equity.
The new proposal is much more like a conventional debt for equity swap.  As noted in our previous commentary, the effect of the proposal is the loss of the Bank’s status as part of a mutual group.  It becomes instead a conventional bank accountable to its shareholders in the same way as other banks in the UK market.  As is expected in such situations, the incentives for bondholders to agree to the proposals are considerable.  The prospectus for the new securities tells them that, if they do not agree, it is quite likely that the Bank will enter some sort of resolution process and their bonds will become worthless.
The proposal includes some interesting arrangements intended to preserve the values and ethics of the Bank.  The constitution of the Bank will include express reference to the “values of the co-operative movement” and an obligation on the Bank to conduct its business “with the aim of being recognised as a good corporate citizen and contributing to building a stronger and more sustainable society”.  These aims are to be overseen by a Values and Ethics Committee, consisting predominantly of independent non-executive directors of the Bank.  This Committee must set ethical policies for the Bank.  These provisions may only be changed with the consent of the Group, so long as the Group holds at least 20 per cent of the shares in the Bank.
The Bank would argue that these “co-operative” values are a differentiating factor for the Bank in the market for banking services as against its UK competitors, and that the Bank would not wish to change them even if it wanted to do so.  Whether these arrangements will survive commercial pressure and the influence of a group of majority shareholders likely to be dominated by hedge funds remains to be seen.
*See European Restructuring Watch, 18 June 2013