A scheme of arrangement aimed at improving Co-operative Bank’s capital profile through an equity injection and equitisation of its subordinate Tier 2 bond debt was sanctioned by the London High Court today.
Mr Justice Snowden approved the twin applications, one for the bank’s shareholders and one for its noteholders, after being told by Anthony Zacaroli QC that overwhelming majorities in both categories supported the application.
In meetings held on Monday (21 August), the bank’s bondholders approved the bank’s workout plan in creditor meetings by overwhelming majorities of 99.88% by value and 97.12% by number (101 out of 104) of those present and voting. Turnout was around 95% (by value). The liabilities subject to the scheme comprise the GBP 206m 11% 2023 as well as the GBP 250m 8.5% 2025 Tier 2 notes.
CLICK HERE to see Co-operative Bank’s skeleton argument for the sanction hearing.
Zacaroli QC stated that the troubled UK-based lender needed to go ahead with the scheme application to address its capital adequacy issues. He added that in the absence of the scheme, the Bank of England was likely to launch special resolution processes against the bank, which would lead to mandatory write-downs of the subordinated notes. Zacaroli QC noted that GBP 400m of the bank’s senior notes are due to mature in September 2017; hence the urgency to address the group’s finances.
The scheme was prepared in cooperation with an ad hoc committee of the UK-based bank’s largest creditors. The five-strong committee consists of Anchorage, BlueMountain, Cyrus Capital, GoldenTree and Silverpoint and held 47% of the scheme claims as well as 32% of the bank’s ordinary equity as of 28 June 2017.
One main feature of the scheme is to transfer the post-workout equity of the bank to a new holding company, and to pass control rights to shareholders owning a special category of shares in it (“B Shares”). B Shares will be solely reserved to holders of ordinary shares (“A Shares”) who will have a minimum stake of 10%.
Given their large stakes in the current scheme debt, most of the B Shares are expected to be held by the members of the ad hoc committee.
However, the court was told that BlueMountain will fall short of the 10% threshold, while Invesco is expected to join the club.
Under the scheme, holders of the 2023 and 2025 notes will have their claims written off in exchange for a 17.4% equity stake in the new HoldCo. 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 chipping 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.
One potentially controversial feature of the scheme was the constitution of the classes for the purpose of voting on the plan. The company had proposed to have all its noteholders, except holders of claims inferior to GBP 100,000 who were left out of the scheme, to vote in a single class. This meant that upon closing of the restructuring most bondholders only stand to receive category “A shares”, which solely carry economic rights, but not 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 post-workout.
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 Snowden J ordered Apollo Capital Management to vote in its own separate class due to its position as future anchor shareholder.
However, at The Co-operative Bank’s convening hearing, Arnold J was convinced by Zacaroli QC that the present situation was dissimilar to that of the Stemcor scheme.
In today’s hearing, Snowden J noted that the “conventional approach” in such matters was that the sanction stage judge doesn’t revisit the class issue, “unless somebody compels him to do so”.
He was also told by Zacaroli QC that B Shares were open to any holder of 10% of the A Shares, a position which is in theory open to any given stakeholder. “It is a fluctuating right, and potentially available to all,” he said.
In addition to the right to receive B Shares, members of the ad hoc committee will have the non-exclusive possibility of participation in back-stop fee arrangements for the GPB 250m new monies. They will also receive 5% of the new HoldCo’s equityas payment of their professional advisory fees.
Zacaroli QC added that the present situation differed from Stemcor in the sense that the benefits confered on the holders of B Shares are not the same as those accorded to the anchor shareholder in Stemcor. He also noted that if the votes of five “principal investors” were taken out of the results, the majority by value in favour of the scheme would fall by a very small margin (from 99.88% to 99.7%).
Snowden J agreed: “It seems to me if not obviously, at least strongly that [in the case Stemcor] anchor shareholder and its affiliates were in danger of falling into a different class, because they attended [creditor] meetings, knowing that they would have different rights [at the end of the process].”
As for the exclusion of the individuals holding smaller than GBP 100,000 chunks of the 2023 notes (retail holders), the bank’s lawyers argued in their skeleton argument that their client “did not believe it to be in the best interests of retail holders who had acquired debt instruments in the Bank to be forced to accept an illiquid equity investment of uncertain value”.
They also added that it was not financially possible for the bank to make cash considerations available to all scheme creditors, and that given “the manner in which retail notes are held”, there would have been a risk that a scheme including them would not have been able to proceed.
Zacaroli QC noted that should retail noteholders really wish to be part of the scheme, they could do so by increasing their stakes to higher than GBP 100,000. He added that the cash consideration offered to retail noteholders, a pro rata share of a total sum of cGBP 13.5m, amounts to GBP 3-GBP 4.5 for every GBP of claims, which compares favourably to the recovery prospects of the new money providers who stand to recover GBP 1.50 for every GBP 10 of their existing claims.
The cashing out of the retail noteholders was carried out through a consent solicitation process, which again received overwhelming support.
Snowden J noted that it was for the bank to decide who it would want to enter an arrangement, adding that there was no suggestion that the “consent solicitation could be regarded in any way as expropriation of minority rights”.
Based on a valuation study carried out by financial advisors Grant Thornton, recovery prospects for the subordinate bondholders in a liquidation scenario are nil. Exclusion from equitisation only affects some 2023 holders, as the smallest denomination of the 2025 notes is GBP 100,000 (versus GBP 10 for the 2023s).
Mr Roy England, an individual retail noteholder who attended the convening hearing and challenged the scheme,as reported, was not present or represented today.
However, another individual, Mr Massoud, was present, and asked to be treated as a retail noteholder despite owning more than GBP 100,000 of notes through his company. Massoud did not oppose the scheme.
Snowden J stated that the issue had to be directly dealt with between the noteholder and the bank.