The UK's bank regulatory and insolvency law structures were unprepared for the global financial crisis. As a result, the UK government's response to intense bank stress in the immediate aftermath of the crunch led to a number of somewhat unsatisfactory ad hoc solutions ranging from nationalisations to encouraging otherwise healthy institutions to take over weaker banks. Generally speaking, there was a criticism, fairly made perhaps, that profits were privatised and losses had been socialised. In common with other European nations, the UK has striven hard to improve its insolvency laws so that a bank requiring a restructuring is able to contemplate a 'bail in' (a debt haircut in old parlance) of its subordinated bondholders to contribute to the restructuring. In recent days the Co-operative Bank (the "Bank") has announced that it requires additional capital to satisfy regulatory requirements. The Bank needs additional aggregate Common Equity Tier 1 capital of £1.5 billion by 2015, comprising:
- £1 billion to be contributed in 2013; and
- £500 million to be contributed in 2014.
The Bank announced that it expects at least £1 billion will be generated in 2013 from an exchange offer with its subordinated bonds into shares and an unspecified fixed income instrument. Much of the crucial detail remains unclear; in particular the exchange ratio, the nature of the new fixed income instrument and how the new securities will be divided up between the different tranches of the subordinated bonds. The Bank currently expects that the launch of the Exchange Offer will be in October 2013. The Bank announced that it expects the remaining balance to be sourced from proceeds of the disposals of insurance assets owned by the group, savings on coupon payments tendered in the exchange offer and certain planned management actions.
The restructuring is bound to be controversial. Although this has been reported as being the first UK bank restructuring which involves a contribution by the subordinated bonds, in 2009, the West Bromwich Building Society's fixed rate subordinated bonds were exchanged into a new type of equity called "profit participating deferred shares" or "PPDS" to increase its tier one capital. The Bank stated that "[t]he Exchange Offer is designed to ensure the Group and investors in the Bank's subordinated capital securities make a joint contribution to the recapitalisation of Co-operative Bank and share in the upside of the Bank's transformation under the strengthened management team." We discuss below the experience of other bail-ins, particularly in Ireland where we see close parallels. We also review how the Bank's restructuring is likely to be implemented and focus on what inducements, negative and positive, there will be for the holders to participate in the proposed exchange offer.
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