Britain's Co-operative Bank yesterday accepted a £1.5 billion rescue plan financed by a group of hedge funds who stand to take a huge stake in the firm.
Under the proposal, which will allow Co-op Bank to avoid nationalization, the bank's junior bondholders, including a dozen hedge funds, will exchange their debt for a 70% stake, of which the hedge funds will receive half. The 12 funds own about 48% of the bonds involved in the swap.
Co-op Bank's current owner, Co-operative Group, will retain a 30% stake.
Aurelius Capital Management will become Co-op Bank's largest hedge fund holder under the deal. The hedge fund consortium also includes Silver Point Capital.
British regulators in June ordered Co-op Bank to raise £1.5 billion in capital. Co-op Group had hoped to retain control of the bank, but the hedge funds rejected an earlier plan that would have allowed it to do so.
The participation of hedge funds has worried some in the U.K., who fear that they will turn the formerly mutual company into a standard profit-making bank, shedding its commitment to ethical action. Last month, Aurelius and Silver Point sought to assuage those concerns, writing, "It is important to us that the bank maintain its unique character and ethos." Yesterday, they reiterated that commitment.
"We are proud that the recapitalization will enable Co-op Bank to continue its unique mission as a U.K. bank committed to the values and ethics of the co-operative movement," Caroline Silver of Moelis & Co., which advised the hedge funds, said.
"These guys are providing us the ability of getting back on our feet," Co-op Bank CEO Niall Booker said.
It is unclear how long-term the hedge funds' plans for Co-op Bank are: The bank plans to go public next year, giving the funds a chance to exit the investment.