By Mark Kleinman, City Editor
A group of American hedge funds is trying to reassure the Bank of England about their role in the restructuring of the Co-operative's troubled banking arm ahead of a formal deal to be announced on Monday.
Sky News has learnt that the LT2 Group, a coalition of funds which has forced Britain's most important mutual to cede majority ownership of its troubled lender, has held talks with regulators to reassure them that they do not intend to cross a crucial bank ownership threshold.
Under Prudential Regulation Authority (PRA) rules, any party owning more than 10% of the shares in a regulated bank must receive approval from the banking watchdog.
The stipulation is designed to prevent undue influence being exercised over important financial institutions by unregulated entities.
The rule also applies to a group of investors acting in concert, which hedge funds including Aurelius and Silver Point have been doing as they sought to win a better restructuring deal for bondholders from the Co-op Group.
Last week, it emerged that the bondholders would gain control of 70% of the Co-op Bank's shares as part of a debt-for-equity swap, leaving the Co-op Group still as the largest individual shareholder, although holding just a 30% stake.
Advisers to Aurelius, Silver Point and other bondholders have informed the PRA that none of them plans to individually hold a stake of 10% in the Co-op Bank, and that they should not be deemed to be acting collectively despite their months-long campaign to restructure the bank.
People close to the situation said on Friday the PRA was expected to be sympathetic to the hedge funds' argument, but that the issue was the subject of strict legal tests and would be closely monitored.
The funds are anxious to avoid having to be approved by the PRA because of the length of time the process can take.
The restructuring of the Co-op Bank will involve listing its shares on the London Stock Exchange next year, as it seeks to raise £1.5bn to fill a capital hole in its balance sheet.
Next Monday's financial restructuring is expected to be accompanied by the publication of a revised business plan for the Co-op Bank, which will entail significant cost cuts and job losses.
The news that the Co-op Bank would no longer be majority-owned by a mutual has sparked fury among many customers, prompting the bondholder group to acknowledge the lender's ethos.
"The Co-Operative Bank is unique for its ethics, mission and heritage which are an essential component of the Bank's differentiated approach," LT2 said in a statement last week.
"It is important to us that the Bank will maintain its unique characteristics and ethos.
"The Co-operative Group Ltd. will remain the Bank's largest shareholder by far and the Bank will benefit by this connection to the Co-operative movement."
Spokesmen for LT2 and the Co-op declined to comment.
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