As the market awaits the outcome of the UK Co-operative Bank’s attempts to sell itself, the prospect that none of the non-binding offers that the bank has received will come to terms is very real. If it cannot seal a deal with a potential buyer, it could yet follow the path of UK forbears Bradford & Bingley Building Society and Northern Rock and be broken up and run off.
Although the likelihood of the Co-op being pushed into resolution at this stage is still seen as remote, if it does end up being split into a good and bad bank, its ill-fated predecessors provide some insight into how things could play out.
In late April, it emerged that the Co-op Bank was poised to hire restructuring advisers after its hedge fund owners appointed PJT Partners and Promontory Financial to protect their interests. Whether or not the funds, led by GoldenTree Asset Management and Silver Point Partners, are prepared to inject further capital into the business is crucial to the bank’s future viability.
The Co-op was attempting to secure a buyer as Euromoney went to press – at exactly the same time as UK Asset Resolution (UKAR), which was set up in 2010 to manage the sale of Bradford & Bingley and Northern Rock’s mortgage books, completed the sale of £12 billion ($15.4 billion) Bradford & Bingley-originated buy-to-let mortgages.
The building society was taken into public ownership in 2008, and the sale of these mortgages will see £11.8 billion repaid to the UK treasury. The sale provides timely guidance about the appetite for performing UK residential mortgage-backed securities, just as anyone mulling a purchase of some or all of the Co-op Bank would like to know exactly what its high-quality mortgage book is worth.
UKAR sold £13 billion-worth of performing and non-performing Northern Rock mortgages to Cerberus Capital Management in November 2015. Cerberus subsequently securitized these assets, and the buyers of the Bradford & Bingley loans are following a similar playbook. Blackstone bought the lion’s share (£9.97 billion) of the Bradford & Bingley mortgages and launched an anticipated £700 million RMBS trade backed by them in mid-April, arranged by Citi. Prudential Loan Investments, which bought the remainder (£1.95 billion), is to securitize them via its Harben Finance vehicle.
Crucially, any notes from these deals that are not sold will be subscribed by a consortium of UK banks in an arrangement put in place by UKAR when the sale was announced. This backstop underwriting of the deal was put in place to provide clarity on price and address criticism that the Northern Rock assets had been sold too cheaply. The structure has been well received by investors, and strong appetite for the deals has been reported.
The sale of the Co-op Bank in its entirety is a remote prospect. If the hedge funds are not prepared to inject more capital, its high-quality mortgage book could eventually be up for sale in similar fashion. Some solace can be taken from the fact that the mechanism by which they can be priced and sold on is now well established.