The Co-op bank has secured a £700 million rescue deal, after it started looking for a buyer in February. Its US hedge fund investors will have a bigger stake in the bank. What does this mean?
Q. Why was Co-op bank up for sale?
A. The Co-op Bank put itself up for sale because it had to increase the amount of capital it had after it discovered a black hole of £1.5 billion in 2013. This means it had to put itself in a stronger financial position. In February, it seemed that the only way it could do this was to sell part or all of its business to another company.
At the time, the bank blamed low interest rates and higher costs involved in turning itself around
Q. What’s changed?
A. Earlier this month the Co-op Bank said it was in talks with existing investors to provide additional money. On Wednesday it announced that a rescue deal had been agreed.
The deal means that its investors (American hedge funds) will take a much bigger stake in the bank, swapping some of their debt for equity. In the future, the Co-operative Group will only own 1% of the bank, down from the current level of 20%.
Part of the deal involves the Co-op Bank separating its pension scheme from the Co-operative Group Pension Scheme, which has £8 billion of liabilities.
Q. What does this mean for Co-op Bank customers?
A. It should mean that the bank is able to continue as it currently does. The statement that the Co-op Bank released said on Monday, before the deal was finally announced, said it would be able to ‘safeguard its values and ethics’.
If the bank, or part of it, had been sold, its ethical policy may not have continued – that would have been a decision for the new owners.
SAVVY TIP: As with other banks, the Co-op Bank is covered by the Financial Services Compensation Scheme. That means that up to £85,000 of savings you have with the Co-op Bank would be protected in the event that the bank went bust.
Q. Is it worth switching to Co-op Bank?
A. I’d say it depends on what you’re looking for. If you want a bank that has an ethical policy and that doesn’t charge a fee for banking, it’s worth considering. It has four million customers and many of them have stayed loyal to the bank over the last few years, which have been pretty difficult, to say the least.
The Co-op Bank doesn’t do too badly in terms of service ratings (see the latest banking customer satisfaction survey by Which?)
As I write this, Co-op Bank is offering a cashback incentive if you sign up. You can read about cashback incentives for switching bank in my article and you can find out about alternatives to the mainstream banks in my article.
Q. What does it mean for Co-op Bank bondholders?
A. Co-op Bank bondholders are likely to lose 55% of the the value of their investments. These are not savings bonds, but bonds that were essentially a loan to the bank. They were originally issued as ‘permanent interest bearing shares’ by the Britannia Building Society, which the Co-op Bank took over.
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