By Mark Kleinmann, City Editor
Thousands of small investors in the Co-operative Bank will be guaranteed income for 12 years under a deal to patch up its finances that will be unveiled on Monday.
Sky News has learnt that the Co-operative Group agreed this weekend to structure a rescue deal for the bank by effectively gifting roughly 10,000 retail bondholders a new fixed-income instrument that will provide a contractual cashflow guarantee.
The deal will offer greater protection for small investors, who are the Co-op Bank's lowest-ranking creditors, than was envisaged under proposals originally crafted by the mutual and which were vehemently opposed by bondholders.
Euan Sutherland, the Co-op Group chief executive, wanted to keep control of the banking arm by handing bonds to institutional investors and shares to small investors. The latter group objected to this because the shares are unlikely to pay a dividend, and many small investors depend on income from the bonds.
Despite the improved terms, private investors will still face significant losses on their capital as the Co-op Group seeks to fill a £1.5bn black hole in the balance sheet of its struggling banking arm.
Canaccord Genuity Hawkpoint, a City advisory firm, is said to have decided to advise retail bondholders that the deal they are being offered is a fair one.
The restructuring, which is expected to be announced to the stock market at 7am, is unlikely to be accompanied by details of more than 1000 job cuts at the bank revealed by Sky News on Saturday.
The Co-op Bank is drawing up a new business plan that will see it focus on retail and small business lending, with many back office staff and those in its corporate lending arm facing the axe.
A planned hardship fund, which was to have been set up to help small investors, is now understood to have been abandoned because of the decision to guarantee income for 12 years under the revised deal.
"The hardship fund would have had no real value," said a source close to the situation.
Institutional investors led by two US hedge funds, Aurelius and Silver Point, will own the bulk of the Co-op Bank's shares when they list on the stock market next year.
The Co-op Group will be the largest single shareholder with a 30% stake, and plans to rewrite the Bank's constitution to enshrine the mutual's ethical principles under its new ownership structure.
The Prudential Regulation Authority is expected to issue a statement on Monday endorsing the deal.
A Co-op spokesman declined to comment.
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