Behind the scenes of the first-ever creditor bail-in of a bank in the UK.
Last month The Co-operative Group’s £1.5bn recapitalisation plan for its beleaguered banking arm unravelled as subordinated bondholder activists advised by Shearman & Sterling negotiated hard and settled on a controlling stake of 70% of the shares of the bank.
Under the agreement, bondholders including US hedge funds led by Aurelius Capital Management and Silver Point Capital – dubbed the LT2 Group as they hold subordinated bonds – will receive 70% of the shares in The Co-operative Bank plus £100m in newly-issued securities. They will also inject £125m of fresh capital into the bank while parent company The Co-operative Group will retain a 30% stake.
The deal, which is the first-ever creditor bail-in of a bank in the UK, is far removed from the plan originally proposed by its parent in July, under which subordinated bondholders were expected to take something of a bath, getting around 25% of the shares.
Behind the scenes, the Shearman team comprised financial regulatory head Barney Reynolds, M&A partners Jeremy Kutner and Laurence Levy, finance partners Clifford Atkins and Anthony Ward, and US bankruptcy partner Solomon Noh.
They won the instruction to advise the LT2 Group after a competitive pitch against a number of UK and US firms, in which each had only five minutes to sell themselves.
Reynolds said: ‘The bondholders thought that the bank would be better governed if it was more independent from the group. They wanted more than 50% of the equity. It was genuinely thought that the bank would be more valuable if it was run independently.’
Levy added: ‘The restructuring side that Clifford and Anthony brought was vital. Jeremy devised the capital-raising structure almost single-handedly.’
Bondholder activism is far more developed in the US than it is in the UK and this unexpected turn of events at the hands of US investors has had major repercussions for a UK household name and for its legal advisers. Allen & Overy (A&O), counsel for both the group and the bank, was forced to declare itself conflicted out in early November, with Clifford Chance, led by capital markets partner Iain Hunter and insurance and corporate partner Hilary Evenett, stepping into the breach for the soon to be independent bank, subject to final approvals.
Co-op Group general counsel Alistair Asher, who joined from A&O in the summer and was expected to act for the Co-op and its bank, will now head the group as Brona McKeown from Coventry Building Society takes over as GC of the bank.
Shearman’s managing partner for Europe, the Middle East and Africa, Nick Buckworth added: ‘From our perspective [this is] exactly the type of high-profile opportunity we’ve been building around.’
david.stevenson@legalease.co.uk