Co-Op bank 11% : yield in orbit.

Co-Op bank and group prefs have diverged in price. As of 20 Oct 2016:

Co-operative Bank 11% Sub Notes 80.19p
Yield: 15.647 Running Yield: 13.72

Co-operative Group 11% Final Repayment Notes 20/12/2025 129.75p
Yield: 6.567 Running Yield: 8.48

The price of the Bank prefs means either:

-A high chance the bank will bail them in. Therefore avoid.
or
-It's a stonking yield, a high worthy of the former chairman the Crystal Methodist himself, and therefore fill your boots.

Which is correct? Snippets of information I have found:

1.FT in Aug said the bank was hiring Bank of America to prepare itself for sale after turnaround
2.The bank did not feature in the 2016 stress tests presumably as too tiny https://www.eba.europa.eu/documents/10180/1532819/2016-EU-wide-stress-test-Results.pdf .
But makes a loss and failed the ones in 2014
https://www.rte.ie/news/business/2014/1216/667103-co-operative-bank/
3. Not sure it's entirely relevant but in November the EBA will release proposals for Covered Bonds
https://www.eba.europa.eu/-/eba-holds-a-public-hearing-on-covered-bonds
4. From this Graun article https://www.theguardian.com/business/2016/sep/23/co-operative-group-pre-tax-profits-fall-by-more-than-half-to-17m
"A month ago, the Co-op bank revealed a first-half loss of £177m, down from £204m, but warned that the economic fallout from the Brexit vote was a threat to its recovery plans. The bank said the uncertain economic backdrop was depleting its capital reserves – a key cushion against financial instability."
5. BTW the Bank prefs have just gone XD which has also depressed the price.

I'm sitting on my existing holdings of both, uncertain which way or whether to jump.

Any thoughts, my dears?

BTW there is an earlier wary thread on this matter, since when the price issue has become only more pronounced. http://www.fixedincomeinvestor.co.uk/x/forum.html#/discussion/371/co-operative-bank-plc-subordinated-tier-2-notes-11-2023

Comments

  • As a holder of the Co-Op Bank seniors which mature in September next year I wish I knew the answer (even these are yielding close to 10%).

    I did hold the Bank subs but bailed out early this year as I got too scared holding so much paper in one bank and I figured (at the time) that they would at least get through to Sept 2017. The subs also have a long way to maturity (2023 from memory).

    Of course, the Bank and the Group are two entirely different operations (one's a bank and the other is basically a supermaket/convenience store although it does own some of the bank. I do hold some of the Group Notes and am happy to contine for the time being.

    Sorry - haven't really answered your question.

  • I must admit I bailed out a while ago. My reasoning was simple, I couldn't answer the question posed by Couponcopia. I learned through bitter experience that emotion and investment are a bad mix, so try and hold investments based on fact. Facts are very thin on the ground with the Co-op's accounts and it is simply not in the FCA's interest to let the cat out of the bag with regard to a bank until it absolutely has to for obvious reasons. No doubt the 2017 bond will repay but without facts to substantiate this any investment has to be classed as speculative, hence 10%+ on a sub 1 yr bond.
  • I'm holding rather a lot of the Co-operative Bank 11% Sub Notes and I am about 30% down as of today. I guess the high yield is reflecting the risk and that I should sell but it will be a big hit on my retirement fund. And under the current circumstances how does one invest to recoup? Should I cut and run and take the loss is the question. Does anyone have an idea of what the best and worst case scenarios could be?
  • At the current level they are quite interesting the risk reward is better , have bought some .
  • "The risk reward is better" - better than what? Better than something in particular or better than it was?
  • Well the last quarters results are now in and they made a small profit. The previous quarter showed an improving trend. The outgoing CEO gave an upbeat assessment, could be argued talking his own book.
  • There is some very well informed and lively discussion of Co-op Bank 3 years on from the restructuring I was involved in negotiating and the prospects for its bonds on the new fixed income board I am developing at -
    http://www.fixedincomeinvestments.co.uk/boards/
    You need to register (free) to post and also to see many of the useful features such as topics with new posts, jump to unread posts etc.
  • All Co-Op bank debt (seniors and subs) being hammered today.
  • Blimey, not only dont they have the cash to repay the upcoming senior debt, they might not even have the cash to make coupon payments! Their banks must surely be negotiating by now, but Johnny retail investor kept totally in the dark. Bankruptcy?
  • "Blimey, not only dont they have the cash to repay the upcoming senior debt, they might not even have the cash to make coupon payments! Their banks must surely be negotiating by now, but Johnny retail investor kept totally in the dark. Bankruptcy?"

    John - I have been doing my best to 'switch the light on' for Co-op Bank retail bondholders for some time on my new forum at:

    https://www.fixedincomeinvestments.co.uk/discussion/topic/co-op-bank-bonds-q3-2016-trading-update/

    I do not have time to cross post on here for much longer so it would be good to I hope people will take notice and start using and benefiting from all the work I put in to provide the research, information and analysis which is not available elsewhere.
  • Just read this on the RNS site and reading it as lay person doesn't seem so bad to cause the price to fall so far so fast?

    The last sentence says "The Bank continues to expect to meet its Pillar 1 capital requirements and to maintain sufficient liquidity to meet its obligations."

    Given the price of Subs 42RQ is down by 50% of my purchase price its a big call to cut and run.

    The Co-operative Bank p.l.c.

    26 January 2017

    Update on Previous Guidance

    The Co-operative Bank p.l.c. (the "Bank") is today providing an update with regards to its previous guidance on capital.

    The Bank currently expects to report a Common Equity Tier 1 ("CET1") ratio above 10% and a total capital ratio of approximately 17% as at 31 December 2016. These are unaudited figures which will be updated as part of the Bank's 2016 full year results.

    Considerable progress continues to be made in implementing the turnaround plan. As part of its current annual planning process, the Bank continues to evaluate the impact of various factors on its medium term outlook including, amongst others, the impact of the interest rate environment, the management of its transformation portfolio, the timing of new IRB model approvals, conduct charges and deleveraging.

    As a result, the Bank is updating its previous guidance and now expects that its CET1 ratio will fall and remain below 10% over the medium term and that it is unlikely to meet its Individual Capital Guidance over the planning period to 2020. The Bank continues to expect to meet its Pillar 1 capital requirements and to maintain sufficient liquidity to meet its obligations.
  • edited February 2017
    Graysilk...cards on table I do not hold their bonds...So they expect to report CET1 above 10% for 2016 but below 10% going forward until at least 2020 !!!

    The situation is deteriorating, CET1 13.4% June 2016, 12.6% September 2016, forecasting above 10% for 2016 as a whole. Below 10% going forward.

    CET1 is a measure of bank solvency that gauges a bank’s capital strength.

    Rather oddly their Q3 update has the following...

    The Bank has reviewed the terms and conditions for the Term Funding Scheme (TFS) and, although the Bank believes it would be eligible access to the scheme, it would not be on commercially beneficial terms. As a result, the Bank has not currently made a formal application to access TFS. The Bank continues to maintain adequate liquidity in excess of the regulatory minimum and has only limited wholesale funding maturities in the next 18 months.

    That last sentence seems to have ignored the £400m maturity in September 2017, or does £400m fall into the 'limited' category?

    The Bank of England has been encouraging them to merge with someone else for more than a year but no one will touch them. The BoE credibility is somewhat diminished after the Lloyds HBOS debacle.

    I can see 2 routes (barring a miracle).

    1/ A forced merger with another entity with risks underwritten directly or indirectly by the government. For this to happen there will have to be buckets of sugar coating to the 'buyer'.

    2/ A bankruptcy and nationalisation.

    For both the BoE will demand defaults on bonds.

    My betting is on number 1, the politics for number 2 is too horrible to contemplate. Timing ... shortly before they have to stump up £400,000,000 plus coupon (another £20,000,000) in September. That's assuming they can find the cash to pay other coupons before then.
  • Co-Op 5.125% 2017 now YTM33%! What are the FCA playing at?
  • Here is another link on the subject.

    I did read an article suggesting that Nationwide might be interested in taking it on, "providing it was in the interests of its members"

    http://citywire.co.uk/money/co-op-bank-puts-itself-up-for-sale/a991546?re=44807&ea=502441&utm_source=BulkEmail_Money_Daily_Summary&utm_medium=BulkEmail_Money_Daily_Summary&utm_campaign=BulkEmail_Money_Daily_Summary
  • I have posted a detailed analysis of the position from the perspective of the regulators and prospective buyers -
    https://www.fixedincomeinvestments.co.uk/fixed-interest-blog/co-op-bank-views-from-the-hill/
  • Mark,

    Your technical analysis is very welcome and as you say paints a 'pretty good scenario'. However doesn't explain why their situation (CET1 for example) is deteriorating when the economic environment is benign. I accept interest rates being low doesn't help, however if interest rates rise their delinquent loan rate will increase.

    As I posted previously where will they get the cash to repay the £400m in September? If they default surely they will have to go into liquidation. The market price of that debt implies a 30% haircut?

    Would current stakeholders throw good money (again) after bad?

    Any purchaser for the 'whole' will surely wait for the Bof E to step in before showing their hand.

    The Bof E would be mad to let them sell the good bits before leaving the government to pick up the pieces.

    My summary is that this bank is toast.
  • John - my analysis is intended to provoke debate by providing a couple of narrow alternate viewpoints. I have already provided detailed analysis of other aspects (including the CET1 trend and current shareholders) on my forum and have been very bearish on Co-op Bank for some time. If you would like to join that debate my forum is at -
    https://www.fixedincomeinvestments.co.uk/discussion/topic/co-op-bank-bonds-q3-2016-trading-update/page/14/

    I do not intend to repeat myself on this forum - I simply don't have the time and I have provided an active forum which I hope you and others will participate in.
  • Co-operative Bank’s losses narrow to £135m amid restructuring:- https://uk.finance.yahoo.com/news/co-operative-bank-apos-losses-082502577.html
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