COURT: Co-operative Bank secures convening order for single-class meeting in restructuring scheme despite challenge from individual noteholders

27 July 2017

A London High Court judge has ordered shareholders of Co-operative Bank, as well as holders of its subordinated debt, to hold a meeting and vote on a scheme of arrangement that will transfer control of the troubled bank to its current bondholders.

 

The creditor meeting is scheduled for 21 August, and will likely be followed by a sanction hearing on 24 August. The liabilities subject to the scheme comprise the GBP 206m 11% 2023 notes as well as the GBP 250m 8.5% 2025 notes.

 

In today’s convening hearing, which kicked off at 2pm UKT, Mr Justice Arnold issued the order despite opposition from a couple of individual holders of the 2023s. The 2023 bonds have a minimum denomination of GBP 10, which means that a significant portion of them (estimated at around GBP 30m) are held by individuals with holdings below GBP 100,000. The company has proposed to buy out those claims outside the scheme by paying them a pro rata share of GBP 13.5m of allocated funds.

 

CLICK HERE to see Co-operative Bank's skeleton argument.

 

One of the individual challengers, Roy England, expressed his objection to the plan in writing as well as in person at the hearing. He argued that the scheme should not, as it does, propose to leave 5% of the bank’s post-workout equity to the current shareholders, while imposing haircuts to bondholders. He also raised questions about the assertion that the company was facing imminent threats of insolvency and liquidation due to alleged breach of capital adequacy regulations.

 

Arnold J noted that some of the grievances raised by the challenger were not relevant to the convening hearing, as at this stage the court was more focused on the correct constitution of creditor classes (and jurisdiction) rather than the general fairness of the scheme.

 

The bank’s lawyers heaved a sigh of relief as the judge agreed to place all scheme creditors in a single class for the purpose of voting on the plan, despite differences in the rights attached to the shares they will own in the restructured bank.

 

Under the scheme, holders of the 2023 and 2025 notes will agree to have their claims written off in exchange for a 17.4% equity stake in a new HoldCo which will be incorporated in the context of the workout. Current shareholders, who for the most part are former creditors who took over the company after its 2013 restructuring, will give up their shares for a pro rata stake in 5% of the new HoldCo’s equity. The lion’s share of the post-workout equity, however, goes to existing noteholders who chip in to a new GBP 250m capital increase. They will receive a pro rata share in 67.6% of the new HoldCo’s shares. The remaining 10% of the new shares will go to members of an ad hoc committee of bondholders who have been involved in the restructuring preparatory works, and have committed to backstop the capital increase.

 

Individual holders of the 2023 notes, whose stakes are smaller than GBP 100,000, will not be involved in the equity allocation.

 

Representing the company, Anthony Zacaroli QC said that the pro rata cash payment to the small retail holders represented a much better outcome for them compared to the rest of bondholders.

 

“In short, they should be given cash rather than being locked into an illiquid company,” he said. “The amount of cash on offer is substantially higher than the value of the equity they would have got, had they been party to the scheme.”

 

He noted that the new money providers stood to recover GBP 1.50 for every GBP 10 of their existing claims, while the proposed cash payment amounted to a minimum of GBP 3 for every GBP 10 of held claims, adding that the figure could possibly rise to GBP 4.5 for GBP 10 of claims. Inclusion of the small retail noteholders, he said, would have also complicated compliance with numerosity threshold requirements of the scheme.

 

One potentially controversial feature of the plan is that the abovementioned equity allocation only relates to the “A Shares” class of equity. Holders will benefit from full economic rights, but the A Shares do not carry any voting or control rights. Those rights are reserved for holders of “B Shares”, which will only be allocated to existing creditors who will hold more than 10% of the A Shares.

 

Instructed by Clifford Chance, Zacaroli QC said that currently five institutions were in such a position.

 

The preferential position of certain creditors in debt for equity swaps has at times led the court to order creditor classes to be fractured. That was the case in a debt scheme presented by Stemcor in 2015, where Mr Justice Snowden ordered Apollo Capital Management to vote in its own separate class due to its position as future anchor shareholder.

 

However, in today’s hearing, Arnold J was convinced by Zacaroli QC that in the Stemcor scheme, the role of anchor shareholder was solely reserved for Apollo, whereas in the present case any creditor had the possibility of increasing its stake in A Shares to above 10%, and thus the path to owning B Shares was open to everyone.

 

Zacaroli QC added that the scheme provided a better outcome for all stakeholders given that, in its absence, the bank cannot meet its capital adequacy requirements, with sanctions on the horizon from the Prudential Regulation Authority (PRA).

 

He added that, based on a valuation study carried out by financial advisors Grant Thornton, recovery prospects for the subordinate bondholders in a liquidation scenario was nil, especially as the company has upcoming maturities on its GBP 400m senior notes in September 2017.

 

Co-operative bank’s subordinated bondholders, among which Silver Point, and GoldenTree, mandated back in April PJT as financial adviser to the troubled bank’s restructuring process, after a sale process failed to attract enough interest from investors, as reported.

 

Last 28 June, the funds agreed to equitise GBP 206m 11% Tier 2 notes due 2023 and GBP 250m 8.5% Tier 2s due 2025 to raise GBP 443m of CET1 eligible equity and participate in a GBP 250m equity raise in exchange for a 67.6% stake, according to a press release.

 

The unsolved issue making Co-op’s prospective suitors walk away was a hefty GBP 1.3bn pension scheme the bank shared with its former shareholder Co-operative Group.

 

However, investors agreed to inject GBP 100m over 10 years and provide more than GBP 216m of collateral to split the two pension schemes, a press release stated.

 

The upcoming maturity of GBP 400m 5.125% senior notes due next 20 September accelerated the timetable of a liability management exercise (LME) to avoid being declared insolvent.

 

Back in 2013 a group of hedge funds, including Monarch and Aurelius, became 70% shareholders of the troubled UK lender as a result of a GBP 1.5bn liability management exercise (LME).

 

by Hossein Dabiri and Antonio Vanuzzo