Hedge funds propose new £1.5bn Co-op package

Hedge funds and boutique investment banks are attempting to derail the Co-operative Bank’s £1.5bn rescue package and replace it with a plan of their own.

A consortium of investors, which includes boutique investment bank Moelis as well as hedge funds Aurelius Capital Management and Silver Point Capital, have proposed a straightforward debt-for-equity swap deal for the stricken bank, according to reports in The Telegraph.

The bank made a loss of £709m in the first half of 2013 and risks being wound up if it does not find new capital.

Originally, the Co-operative had been ordered to raise £1.5bn by regulators. In order to generate the capital, the Co-operative wants to sell off its £500m in insurance assets, inject £500m in capital and dump £500m of losses on bondholders.

However, the group of hedge funds that represents about £400m of the Co-op Bank’s subordinated debt plans to convert £1.3bn of debt into equity, thereby raising £1.3bn of fresh capital and injecting a further £200m into the bank.

A letter issued by investors to the bank said: “Substantially all the required £1.5bn would be raised by converting the bank’s subordinated bonds and preferred stock.”

In a statement by the Co-operative Bank, it said:”We are uncertain of the structure, deliverability and conditionality of what is proposed by Moelis, but we are willing to engage with it to investigate further.”

The group has already sold its life insurance arm to Royal London as part of efforts to shore up the bank’s finances, and is still seeking a buyer for its general insurance unit.

Former RSA chief executive Andy Haste is rumoured to be looking to buy the general insurance business with backing from private equity house Advent.