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U.K.’s Co-op Bank Agrees to a $2.4B Bail In, Bondholders Get a Haircut

“LONDON (Reuters) – Britain’s Co-operative Group has agreed a plan to plug a 1.5 billion pound ($2.4 billion) capital hole at its bank which forces bondholders to pay part of the bill, avoiding a repeat of the taxpayer-funded bailouts staged during the financial crisis.

Using a “bail-in” model, bondholders must swap their debt for new bonds and equity in the bank to be listed on the London Stock Exchange, while the Co-op Group, Britain’s biggest customer-owned business, will also provide financial support for its banking unit, the Co-op said on Monday.

The future of the bank, which has 4.7 million customers, has been in question since Moody’s cut the lender’s credit rating to junk status and warned it might need taxpayer support – something the bank denied. Its capital position had come under increased scrutiny since it pulled out of a deal to buy hundreds of bank branches from Lloyds Banking Group in April.

The Co-op Group, which also runs supermarkets, funeral services and pharmacies, said the plans will provide stability for the Co-operative Bank <cpbb_p.l>, generating 1 billion pounds of new capital this year and 500 million pounds in 2014.

“We have put in place a detailed and comprehensive solution to meet the current and longer-term capital requirements of the bank. In doing so we have agreed a plan to ensure its future,” said Chief Executive Euan Sutherland.

The measures will involve an exchange offer to investors in the bank’s subordinated capital securities, resulting in the transfer of ordinary shares which will be listed in October.

Co-op’s debt holders are all ‘junior’, or ‘subordinated’, a type of bond that pays higher interest than ‘senior’ debt, but carries a higher risk. These kinds of bonds suffered heavy losses in rescued banks in Ireland and Spain….”

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