By Carol Dean
Moody's Investor Services downgraded Co-operative Bank's
(CPBB.LN) debt ratings Tuesday after the bank asked subordinated
bondholders to take heavy losses to stave off a potential
collapse.
The ratings firm has cut the Co-op Bank's senior unsecured debt
and deposit ratings to Caa1 from Ba3, reflecting material risks
that, until the recapitalization plan is completed, further burden
sharing may be required on senior bondholders.
Moody's has also downgraded the bank's standalone bank Financial
Strength Rating to the equivalent of Ca, one notch above default,
from B1. That reflects the imminence of the bank's default on its
junior debt and the lack of clarity over the bank's future given
the uncertainty over the execution risks of the proposed liability
management exercise.
Its junior debt has been cut to Ca from B2 while its hybrid debt
has been downgraded from B3 to Ca.
The cuts are due to "Moody's expectations that investors in
these instruments will only be able to recover between 35% and 65%
of their original investment, with the negative outlook indicating
the risk that the final loss faced by investors may be greater,"
the ratings firm said.
Co-op Bank, part of the Co-operative Group, a mutual
conglomerate with businesses from funerals to supermarkets, said
Monday it aims to raise 1 billion pounds ($1.57 billion) in fresh
capital this year by offering holders of its GBP1.3 billion in
subordinated bonds a mix of new senior debt and shares. Co-op Bank
expects to raise a further GBP500 million in 2014 by selling loans
from its portfolio and the disposal of Co-operative Group's general
insurance business.
Further negative pressure on the Co-op's deposit and senior
unsecured rating could stem from either the bank's failure to
execute this proposed recapitalization and restructuring plan or a
significant deterioration of its liquidity, which could lead to
higher losses for these securities, the ratings firm said.
Despite the emphasis on private sector participation in the
bank's recapitalization and parental support, Moody's said the
deposit and unsecured debt ratings reflect some potential for
systemic support from the U.K. authorities in the event the
recapitalization and restructuring doesn't go according to
plan.
Concerns about the bank's capital shortfall surfaced after it
pulled a deal to buy hundreds of bank branches from Lloyds Banking
Group (LYG) in April with Moody's Investors Service subsequently
downgrading the Co-operative Bank by six notches to junk.
(Margot Patrick contributed to this report.)
Write to Carol Dean at carol.dean@dowjones.com