US vulture funds take controlling stake in troubled Co-operative Bank’s debt

The UK's Co-operative Bank has been targeted by two US vulture funds that have taken a controlling stake in part of the troubled lender's debt. 

Vulture  funds buy securities in distressed investments, such as high-yield bonds in or near default, or equities that were in or near bankruptcy.

Silver Point Capital and Aurelius Capital Management are said to have built the stake in one set of the bank's loans, as they gained a strong position with the lender working to fill a £1.5 billion capital hole.

The Co-op Bank had to undertake sweeping debt restructuring following the Prudential Regulatory Authority spotlighting a £1.5-billion shortfall at its banking arm.

The rescue plan, announced in June, envisages wiping out existing equity in the bank, wholly owned by the Co-operative Group – a holding company for a diverse range of businesses spanning across supermarkets, pharmacy chains and funeral parlours.

The Co-op Group would then raise an expected £500 million of debt for injection into the bank as fresh equity, however, further capital would be generated with the conversion of the existing bonds into equity.

The restructuring would mean financial distress for thousands of Co-op Bank investors, as they would face large losses on the lender's subordinated bonds and preference shares as part of the debt restructuring.

According to The Sunday Times, the funds could use their position to force higher losses on smaller investors who stood to lose out from the bank's restructuring, as their tier 2 bonds outranked the holdings sold to smaller investors.

The reportquoted a source close to the two funds as saying, that they were not there to cause mischief rather they wanted to sit down with the bank and work out a consensual solution.