Trustees of the Co-op’s giant pension fund are asking US hedge funds to provide a long-term financial guarantee as part of their plan to save one of Britain’s biggest lenders.
Sky News has learnt that the custodians of the £10bn Pace retirement plan are insisting that Co-op Bank bondholders commit to funding a newly sectionalised Bank pension scheme over a multi-year period.
Without that assurance, the trustees are said to be unwilling to back the bondholders’ plot.
Their demand comes amid ongoing talks between the Co-op Bank, the hedge funds and regulators about a deal to shore up its finances.
It is understood that the Co-op Group – the Bank’s former sole shareholder – has ruled out providing new funds to the joint pension scheme to help terminate the long-standing reciprocal guarantee deal between them.
Although negotiations were continuing this weekend, sources indicated that there was little sign of an end to the impasse.
A September deadline for repayment of a £400m bond is seen as a cut-off point for the Co-op Bank to agree a consensual restructuring and avoid becoming a test case for the Bank of England to use new powers to resolve failing lenders.
The trustees are said to want the Co-op Bank bondholders, who also control most of the struggling lender’s shares, to commit to funding its pension scheme on a low-risk basis over an unspecified period.
The bondholders have offered to inject £62.5m in cash over five years to eliminate an actuarial deficit, with the scheme gaining rights to Co-op Bank assets in the event of a future crisis.
The Co-op Group is unhappy with this plan and is resisting efforts from the hedge funds that it should make a financial contribution to end the “last man standing” arrangement between it and the Co-op Bank.
That deal means that each side commits to standing behind the other’s pension liabilities if it fails.
The Pace pension scheme has about 90,000 members, and is chaired by Harry Baines, who also chairs the trustees of the giant Lloyds Banking Group retirement fund.
It is being advised by KPMG.
Sky News revealed last weekend that the Co-op Group, which owns a 20% stake in the bank that carries its name, wants the hedge funds to inject more than £200m in cash into Pace to win its support for the restructuring.
The Co-op Group, which is one of the UK’s biggest food retailers and funeral care providers, would see its stake in the Bank slashed to less than 5% under the bondholders’ plan.
Under the current Pace agreement, the Group pays £20m into the scheme each year, with the Bank contributing £5m, reflecting their respective assets and liabilities.
A new triennial valuation of the scheme deficit is due to take place this year.
The hedge funds are understood to have secured outline support from banking regulators for other aspects of their Co-op Bank rescue plan last week.
There remains a semblance of takeover interest from a consortium comprising Swiss and Qatari investment groups, although the prospects of a bid succeeding are remote.
The scramble to rescue the Co-op Bank has been triggered by its need to find more than £700m of new capital in the next few months.
The US hedge funds – Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management and Silver Point – are said to be willing to inject more than £240m of new equity into the lender.
In March, the Co-op Bank said it would require between £700m and £750m of new top quality capital, the majority of which would be generated by exchanging some of its debt for equity – a process known as a liability management exercise.
The remainder would come from issuing new shares.
The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its £1.5bn bailout in 2013.
The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.
The Co-op Bank’s balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.
Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.
The Co-op Group, Co-op Bank, pension trustees and bondholders all declined to comment.