Co-op boss defends rescue plan

The boss of the Co-operative has written to about two million members to reassure them over the mutual's future and defend a painful rescue of its banking arm.

Acknowledging investor fury over the "bail-in" of the Co-operative Bank - in which bondholders must help plug a £1.5 billion hole in its finances - new chief executive Euan Sutherland said the plan will avoid further damaging asset sales and is a better option than a taxpayer bailout.

Mr Sutherland emailed 1.9 million members at the weekend after a turbulent three months which has seen the collapse of its deal to buy more than 600 branches from Lloyds Banking Group, warnings from ratings agency Moody's over its health and a £1.5 billion capital shortfall.

The former B&Q boss said while the group is struggling through difficult times, it remains "fundamentally strong" and is now well-placed to tackle future challenges.

Mr Sutherland, who took over in May, said while some investors suggested the group should carry the full burden of the rescue, it also has responsibilities to its 7.5 million members.

He said: "The solution that we have come up with balances the long-term interests of our members and investors, giving all the opportunity to benefit from the potential future upturn in the bank's fortunes and the long-term sustainability of the group as a whole. These are clearly difficult times for us but I believe they are challenges that we are now well placed to meet. The Co-operative Group remains fundamentally strong and our ethical leadership, in retailing and the provision of financial services, remains a compelling force in the market place."

Mr Sutherland insisted the bank will remain part of the member-owned group, while admitting its reputation has been damaged by the scandal. The Co-op recently appointed former Treasury mandarin Sir Christopher Kelly to head an independent investigation into what went wrong at its banking arm. He will report back at the mutual's annual meeting in May.

The black hole in the Co-op Bank's capital reserves largely stems from commercial property loans acquired through its disastrous acquisition of Britannia Building Society in 2009. Soured loans made by the Britannia were behind almost £470 million of bad debt write-downs in 2012, which sent the group plunging to a £673.7 million loss.

Concerns over the Co-op's finances came to a head in May after credit ratings agency Moody's downgraded the bank to junk status, just weeks after it pulled out of a deal to buy 631 branches from Lloyds.

The investor ''bail-in'' is due to happen in October, and will raise £500 million of capital from investors. It will see bondholders offered shares via an "exchange offer", resulting in a stock market listing for the group's banking arm. The group is also raising some of the funds by selling its insurance businesses.

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