Hedge Fund Cock Up?
This morning's Times carried this enigmatic piece on page 56:
"Co-operative Bank: Hedge funds planning to take control of the lender have been left with a potentially expensive loophole. At issue is £125 million of new capital that lower tier bondholders, led by the funds Aurelius Capital and Silver Point plan to inject."
This afternoon the FT explains what has happened thus:
"A group representing the hedge funds and other lower tier two investors on Thursday pledged its support for the restructuring, after asking the Co-op to make a last-minute amendment to the terms.
The change is intended to close a loophole that was providing an opportunity for brokers and traders to undermine the new equity issuance by submitting claims for larger numbers of shares than they were entitled to. This could have meant that the LT2 group ended up with a smaller equity stake than they expected.
“The LT2 Group confirms its support for the recapitalisation of the Co-op Bank and . . . is fully supportive of the new management team for the bank,” it said"
The detail of the new announcement on the Co-op Group website reveals that the Bank may apply to court to modify the Scheme of Arrangement. Some of the holders of LT2 bonds have requested that and the Bank is considering whether or not to make the application. The statement says that no slippage in the timing of the deal beyond 31.12.13. would be permitted. That is a PRA deadline on the capital. The legal obligation of some of the holders of these securities to support the Scheme (the "lock in agreement") would stay in place whether the Scheme is modified or not.
Here's the change the announcement outlines. Under the existing Scheme as proposed these holders get:
"a combination of:
£100 million of 11 per cent. Subordinated Notes due 2023 to be issued by the Bank (“Bank T2 Notes”); and
112,500,000 new ordinary shares in the Bank (“New Ordinary Shares”) representing 45 per cent. of the total issued share capital of the Bank following completion of the LME.
The holders of the Dated Notes will also be entitled to subscribe for 62,500,000 additional new ordinary shares in the Bank (the “Additional New Ordinary Shares”) at a price of £2.00 per new ordinary share representing 25 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration equal to £125 million, pursuant to, and on the terms of, the Scheme with such subscription being underwritten by certain persons who were holders of Dated Notes as at 4 November 2013. The Scheme provides that any holder of Dated Notes is entitled to elect to subscribe for between a minimum election of 50,000 (for an aggregate subscription price of £100,000) and a maximum election of 62,500,000 Additional New Ordinary Shares."
If the Co-op Bank made an application to court and the court agreed the modification they would get:
"a combination of:
£100 million of Bank T2 Notes; and
141,666,666 new ordinary shares in the Bank representing 56.67 per cent. of the total issued share capital of the Bank following completion of the LME.
The holders of the Dated Notes would also be entitled to subscribe for 33,333,334 additional new ordinary shares in the Bank at a price of £3.75 per new ordinary share representing 13.33 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration of £125 million3(iii), pursuant to, and on the terms of, the Modified Scheme. This subscription would be fully underwritten by, amongst others, the Ad Hoc Group. The Modified Scheme would provide that any holder of Dated Notes would be entitled to elect to subscribe for between a minimum election of 26,667 (for an aggregate subscription price of £100,001.25) and a maximum election of 33,333,334 additional new ordinary shares. The allocation mechanism for the allocation of additional new ordinary shares described in the explanatory statement dated 18 November 2013 relating to the Scheme would otherwise remain unchanged."Note 3(iii) reads: '33,333,334 (representing the balance of 13.33 per cent. of the total) will be available for subscription by holders of Dated Notes pursuant to, and on the terms of, the Modified Scheme for an aggregate consideration equal to £125,000,002.50 (representing an effective subscription price of £3.75 per share)'."
This appears to mean that they would get more shares up front and subscribe for fewer further down the line. However,:
"The total number of new ordinary shares in the Bank issued to holders of Dated Notes as a class under the Modified Scheme would be the same as the number to be issued under the Scheme."
I fear I am at the limits of my ability to interpret this information here but maybe a failure to get the Scheme modified could cost them £125m without changing the overall percentage holding they would have?
Maybe this was an error in transcribing what was agreed to the detail of the official Scheme documents or maybe it was only realised later that there was an issue about the timing and minimum and maximum permitted subscriptions by this Group and its effect on their stake?
The position of the classes of creditors and preference shareholders deciding by tomorrow whether to take extra money for early agreement will be unaffected by the proposed change so maybe a court would grant a modification if it was asked to?
The FT reported at 4.47pm today that Aurelius has "walked away" by selling most of its stake to another Hedge Fund.
"Aurelius piled into Co-op Bank’s lower tier two bonds as a severe capital shortage emerged at the lender in the summer. Along with several other hedge funds, including Silverpoint Capital and Beach Point Capital, it built up a blocking stake in the bonds, which it used to secure a far better deal for creditors than had originally been offered by the bank.People familiar with Aurelius’s decision to sell said it was based purely on economic value, as its bonds performed strongly after the restructuring deal was announced."
However, because key parts of the deal have already been contractually agreed, the obligation to vote for the Scheme and the commitment to the ethical aspects of the Bank's constitution will still bind the new owner of the Aurelius stake.
Flowers and the Chancellor
The announcement on the Co-op Group website also warns investors:
"On 22 November 2013 the Chancellor of the Exchequer ordered an independent investigation into events at the Bank and the circumstances surrounding them to take place under section 77 of the Financial Services Act 2012. Separately, the Financial Conduct Authority and the Prudential Regulation Authority each announced on 22 November 2013 that they are considering whether they should also launch their own formal enforcement investigations. The precise scope and timing of these investigations is yet to be determined.
The regulatory and other investigations that have been recently announced are likely to subject the Bank to greater scrutiny from regulators, will take management time and result in the Bank incurring costs not currently included in its business plan which cannot be quantified at this time. Recent events may have caused some brand and reputational damage, but it is too early to form a definitive view as to the extent of such damage. These recent events, together with the competitive landscape in which the Bank operates, the introduction of seven day account switching and the associated increased competitor marketing activity at a time when the Bank has been constrained in its ability to undertake its own marketing activity, may be a contributing factor to an increase the Bank has seen in the switching out of current accounts. However, the Bank's retail deposit base remains broadly stable and it is too early to identify any significant trends at this point. Further, the Bank's liquidity position remains stable. Overall, the Bank's performance has been consistent with or, in the case of costs, slightly better than, management’s expectations."
Interesting times indeed..........but lets hope the Scheme gets approval.
Labels: Aurelius, Co-op Bank, Co-op Group, George Osborne, Hedge funds, Paul Flowers, Perry Capital, Recapitalisation, Scheme