Co-op 5.55% – a great bond for the brave

Friday’s news that Moody’s had downgraded Co-op Bank’s bonds to junk may be of quite some interest to Right Side readers. Last year, I wrote about the Co-op 5.55% perpetual bond. And until Friday, it had been performing very well indeed. But the body-blow from Moody’s knocked about a third off the price of all Co-op’s bonds.

As I’ll explain, by my reckoning this is a massive overreaction – and it gives us a great opportunity. And while I generally don’t like to question the markets, I do think in this case, it’s not so much that it’s got the wrong end of the stick, as it’s getting completely the wrong end of the tree.

Now, as it happens, I agree with everything in Moody’s analysis – I’ve been through it with a fine-tooth comb over the weekend. But the thing is, as correct as it may be, this report is totally irrelevant.

If you’ll allow me to explain why, you can judge for yourself whether or not the Co-op’s bonds now offer a very nice entry point for anyone willing and able to move quickly.

What Moody’s said

So that there’s no confusion, let me first make it clear that these bonds are nothing to do with any of the Co-op’s retail products you’ll find in store. These are bonds traded in the capital markets; markets where private investors seldom go. And for anyone with cash in the Co-op Bank – again, there’s no need to panic… just make sure you don’t leave anything more than £85,000 with any one financial institution.

Now over to Moody’s; they make three main points.

First, the bank faces significant losses from its portfolio of ‘non-core’ loans – these are essentially commercial real-estate loans. In 2009, the Co-op took over the Britannia building society. I think it’s fair to say the Co-op didn’t do its homework, and it turns out Britannia had made a lot of rather foolhardy loans in the commercial property sector.

Second, the bank hasn’t made enough provision for these souring loans. Basically, the bank has to make an assessment of how much money it may lose on these loans in the future, and begin to write off the value now.

Third, the bank isn’t generating enough money to be able to put things right itself. Now that the Co-op has dropped out of the bid to take on a whole batch of Lloyds branches, Moody’s can’t see them generating enough income to build up a balance sheet strong enough for incoming capital adequacy directives.

My response to this analysis is yes, yes, and yes. But then again, so what?

This is irrelevant

To understand why this analysis is irrelevant, we need to look at the Co-Op’s corporate structure. And here it is…

Co-op bank's corporate structure diagram

Now this chart is a little out of date. But it is very useful. Because to understand what’s going on at the Co-op, you need to understand the ownership structure.


The green boxes at the bottom are the financial businesses; note that the Co-op Bank is but one of these businesses. And just to confuse matters, all the financial businesses are owned by another holding company called “Co-operative Banking Group” (the orange box). And that ‘group’ is owned by the Co-op Group. And there’s a reasonable chance that you are a part owner. I mean, there are about eight million members of the Co-op and it runs everything from supermarkets to pharmacies and funeral parlours.

Right, so Moody’s is assessing the robustness of that green box at the bottom on the far right. What they’re saying is that the bank is likely to need some new capital in order to comply with regulatory demands. Further, they can’t see the banking group (remember, the orange box) as having the requisite finance.

Again, Moody’s are very, very likely to be right. But so bloody what? The point is, the ultimate owner, the Co-op Group, most certainly has a bucket-load of capital.

In fact, last year, the Co-op Group lost millions to the bank. Looking (as I have) at the 2012 report and accounts for the group, you’ll see that despite making what they call a “core profit” of £120m, the group lost nearly half a billion on the bank. Oops!

This is a rather sad indictment of mutually owned businesses. I mean, this kind of practice doesn’t go down well in a traditional shareholder democracy. As I’m sure you know, the architects of Lloyds’s dreadful merger with HBOS were made to walk the plank. And as for the Fred Goodwins of this world…

But for this mutual, no such venom. I bet most ‘members’ don’t even know they own this business. And I can’t imagine the annual report and accounts has had many downloads!

I’m sure the directors would much rather Moody’s went away and didn’t make such a fuss and draw attention to this rather sad tale.

The directors would much rather just fund the banking business from the central pot and forget all about the disastrous takeover of Britannia. Heck, the report and accounts says that profit isn’t really the main motivation for this business anyway.

And aside from that, the directors have actually been trying to put things right at the banking group. For a start, the life insurance side of the business (the first green box) is being sold. The general insurance arm (second green box) is up for sale too.

Together, these two sales should bring in enough money to keep the regulators happy. And if not, then the central group may have to put its hand in the members’ collective pocket again.

The bonds offer the brave a very attractive opportunity

Just to re-iterate, Moody’s is right. The bank risks having to seek external support. But ‘external’ support is very, very likely to come from the ultimate owner of the bank – the Co-op Group.

Now, though I make that bold statement, we have to remember that this is supposedly a democratic institution. That means, the ultimate decision rests with some eight million members. Neither I nor Moody’s can say with 100% certainty that the Co-op Group will continue to bail out the bank. And that’s all Moody’s is saying.

But let me put it to you that I am 99.9% sure that the group will not bust the bank.

It seems to me that this mutual is controlled by the board members. And in reality, there’s no established movement to control the board.

That means nobody has to own up to mistakes, and moreover, they can continue to leach money out of the profitable side of the business to prop up the loss-making side.

To say that this bank is weak and, on its own, lacks capital is as correct a statement as it is irrelevant.

Still, it does leave Co-op bonds trading at very attractive levels.

You’ve got to love Moody’s – triple-A ratings on securitised subprime mortgages, and now tarring our most venerable of mutuals with ‘junk’ status.

Before you go rushing in, please remember, this is only my opinion. Be aware that where there’s reward, there’s also risk. Visit the London Stock Exchange’s website if you want more details, see my Co-op bond article as to why I think it’s a good buy… and please don’t skip the risks I highlight at the end of that piece.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Barrie Craig

    My understanding is that the Co-op Group has no legal obligation to provide further capital to the Co-op Bank which is a separate legal entity.

  • CJ

    Hoping for some help here.

    I’d set a buy order a few weeks back for these at 70p. On Friday at 08.01 this was activated at….70p, before the humans set into action and the price duly plummeted to circa 50-55p. Clearly with the news on Friday I wouldn’t have bought at 70p (plus I wasn’t awake). Am I just ridiculously unlucky and have to suck it up, already facing a 25% loss in my ISA account (loss not even tax deductible as some small compensation) whilst vowing to never use orders again (I’ve only just started using them as I was told it ‘takes the emotion out of entries’) or is there some way of crying foul?


  • CP

    Surely if there is a capital shortfall it is highly likely they will stop paying out on the prefs for now, and as these are non-cumulative that is money you will never get back.

  • Mark


    Bengt, rather than redeem the bond at par…… could the Co-op buy their own debt in the market place and effectively pay the coupon to themselves?

  • bengt


    You are absolutely right. Co-Op can abandon its banking division…
    I don’t believe they will. If you read its report and accounts, you’ll see they’re committed. What’s more, you’ll see that this is very much an ethical enterprise. Shafting bond holders, in order to maximise group profits doesn’t seem to be the raison d’etre.

    And the government wouldn’t like it!

    I expect the regulators to move heaven and earth in order to allow the bigger group to bail out the bank.

    CJ – you are very unlucky – and I can’t see that you’ll get any way with annuling this trade. The stock opened on friday morning in seventies… and then fell off a cliff.

    Never, ever place a trade overnight. Not least because with stocks, the morning auction can lead to some very erratic prices.

    A tough learning curve!


  • bengt

    CP – Not entirely sure I get what you mean? The instruments I@m talkign about are not pref’s – they are bonds.

    Mark, I agree entirely. I have to confess, I don’t know the legal set up with Co-Op bank – but usually, banks can buy back their discounted debt and retire it. I would have thought that this would be a fantastic solution to the regulatory requirements – especially at these discounts to par!

    Moreover, there is an argument to say that the Co-Op should redeem this bond in 2015 (it has that option) and create instead a convertible note (which the regulators prefer). It’s a complex issue – and one that hasn’t been fully explored by the industry yet. But if they redeem – it should be at £1 – offering a fantastic return for anyone paying 52p in the market today!


  • hls

    Can anyone else provide input on the co-op legal situation?
    also based upon Bengt’s oringal article the current yield is 11.11% (assuming price of 50p). plus capital doubles in now only 2.5 years. so I make that roughly 30% GRY

    so in my book we are in punt terrority here. certainly don’t bet the house on it. risky but high pay off i.e. money could more than double in 2.6 years. haven’t done the sums on the libor stuff.

    I think you’ve been unlucky here, can’t see any reason why you’d be able to ‘unbuy’ them. A good reason not to use buy or sell orders.

    I think this is a good example of why traders say never leave a position open overnight. Personally I’m an ‘investor’ and take the sudden plunges with the sudden rises. I don’t tend to use orders though.

  • John, Bahrain

    Very interesting article Bengt. Great to have you on our side!

  • Warun Boofit

    I buy this story and want to take a punt but I am not very clever and having problems calculating how much I will pay , having dropped by another 8.64% today they are 48.8p clean , so according to the stock exchange website I need to add accrued interest but how much or should I just try and buy them through my ISA provider who will give me a totally dirty price ?

  • MHC

    I have checked Hargreaves Lansdown which is where my ISA is but can not locate this 5.5555% bond. There is a 9.25% with code CPBB but no CPBA.

    Is it me or them?

  • Broomtree

    Co-operative Bank plc 5.5555% Perp Sub Bonds
    Sell: 53.50pBuy: 53.50p20.25p (37.85%)
    Market closed. Prices as at close on 10 May 2013.

  • John, Bahrain

    This morning’s HL update – the price is even lower:

    Co-operative Bank plc 5.5555% Perp Sub Bonds
    Sell: 47.00p Buy: 50.75p4.63p

    I fancy a wager when markets open.

  • Ben

    This just smacks of market overreaction, and in a world looking for yield on investments, a c.10% running yield (ignoring all the possibilities with LIBOR, default or redemption) I can’t see it staying that high for very long.

    Another cracking opportunity, brought to you by Saelensminde ltd! Thanks Bengt for hunting these gems out, and explaining them to laymen like me, so clearly.

    For me, this validates my thesis of keeping some cash free in the account, ready to go when an opportunity pops us. Another advantage of being a small private investor with no point to prove.

  • moira levy

    thank you Bengie for your opinion on this investment. Very reassuring. It will be fun to tell you later that you were right after all

  • fsaccountant

    Having done a bit of research into these bonds I would just like to express a few things I believe I have found.

    – I believe the 5.5555% is only fixed rate until 14 December 2015.
    – After this time they switch to a floating rate of interest.
    – I believe this to be 3month LIBOR + Margin
    – I believe 3 month Libor to currently be approx 0.5%, the margin listed as 2.05%.

    Please feel free to check and validate this. The terms of the bond can be seen here:

    In the prospectus on the right hand side.

    Please note this does not constitute investment advice. Always do your own research.

    All the best.

  • Fernando Rodrigues

    Please do check bengt’s original article where your findings are already covered:

    Best regards

  • fsaaccountant

    Thanks Fernando, I hadnt seen the other article. I am pleased to see the research is correct as per Bengt though.

    I believe there is an outcome which Bengt does not mention in the other article, which I believe to be the most likely.

    Lets say in 2015 you are still holding the bond. LIBOR is at 1% p.a. (as current), and the margin is 2.05%.

    You would be receiving 2.05% on par, which is approximately, 5.7% on current price.

    Whilst 5.7% is nothing to turn your nose up at, there are equities which yield that and more. Also bear in mind if the yield fell from the current approx 11% to 5.7%, that suggests a potential 48% fall in value of the bond, assuming investors still require the same yield to compensate for the risk of the bond.

    Thoughts anyone?

    Please note this does not constitute investment advice. Always do your own research.

    All the best.

  • Changing Man

    Interesting to see that shares in the Co-Op bank itself are up 7% today and this bond by 3.23%. the volume of trades in the bond is very low and 66% are sell orders. Currently at 52.1 so am thinking that it may pay to wait until further panic sellers clear out? clearly there must be a finite risk of default priced into this bond but if there is still confidence in the bank’s own shares then the bond should be lower risk?

  • felix

    an excellent article,but a better bond isCo op Bank 5.875 March 28 2033 no call IMHO. Market about 56 I think.

  • Mike, also from Bahrain

    So everyone is crazy then for selling? These are subordinated bonds, are they not? Recent precedent from Europe is that subordinated debt holders paid up for bank’s losses. Secondly, the market knows that the Co-op has to sell its insurance etc business now in a firesale type situation, so how much can it raise? And finally the UK economy is such that its entire banking sector doesn’t inspire any confidence. So in my view the use of the word “brave” by the author is equally a euphemism for “stupid”…

  • MrB

    My broker sent these levels this afternoon

    COOPWH 5.125 09/17 91.55/92.35

    Lower Tier 2
    COOPWH 5.75 24(19) 58.50/61.50
    XS0188218183 (non call 5yr Gilt yld +194bps)

    COOPWH 9.25 04/21 66.50/68.50

    COOPWH 7.875 12/22 62.50/64.50

    COOPWH 5.875 03/33 51.50/54.50

    Upper Tier 2
    COOPWH 5.555 Perp-15 49.50/52.50

    COOPWH 13 Perp 75.00/85.00

  • Triceratops

    Interesting article, I’d be keen to hear peoples views on the prospect of a bail in for the bond and preference share holders though. I think the Yorkshire Building society carried out a tender offer which effectively gave bond holders a 50% haircut. Replacing the existing bonds with higher yielding ones but based ona nominal of £500 rather than £1000 If the size of the capital hole is over £1bn I would have thought some kind of contribution from the bond holders would be seen as “fair” by the CO-OP board. i.e a blend of asset sales and bond haircut would get them where they needed to be without external help. I hold some CPBA and at 52p agree that even with some kind of moderate haircut it is very likley these will give a decent return in the medium term, just that it may be a bumpy ride..

  • Mike, also from Bahrain

    Precisely Triceratops. It’s very hard in my view to gauge whether the Co-op will be forced to use a grade 1 machine or grade 4 etc. A full head shave is unlikely, but I don’t reckon even seasoned investors can be reasonably confident in today’s new-normal environment.

  • CPBA bond holder

    Moody’s can probably downgrade a lot of bank worldwide, the Co-opertive have had no gov bailouts nor have they asked for any. that’s not to say they will need to improve their capital as is the case in the whole banking sector.
    The UK is not cyprus so I think the probability of going bust is very low, there has been an overeation and the 5.55% retail bond looks very cheap at these levels, expect a re-bound in the coming days.

  • Changing Man

    There may be some indication of what might happen in the Northern Rock and Bradford&Bingley case? Northern Rock had issued £20m of 12.6% bonds (PIBS) and B&B £50m of 11.6% plus £60m of 13% bonds. After government aid was sought, no further interest was paid and investors were eventually offered 33-38% of the bond value back! You might say that the Co-op is different but on this example 48-52p sounds expensive?

  • Bill

    Hi Bengt

    Seems the interest date on the bond is the 16 June and so would have to pay nearly 2.25%( half of 5.5%) to the previous owner of the bond . I can appreciate that getting the bond on a discount but would it be worth waiting for the 17 June and so not to pay this?


  • CPBA Bond Holder

    @ changing man
    In response to moodies downgarde the Co-op said it had a “strong funding profile” that was “significantly above the regulatory requirements”. Like all banks they are raising capital reserves to meet their Prudential committments, they have a clear plan.
    It doesn’t sound like they are about to default which would have negative impact for any future bonds they may want to issue.
    They also appear to have a good record of public ethics which Northern Rock recklessly exceeded in my opinion, we are not about to go back to 2008 even though progress for banks has been slow, the future appears much better.

  • CPBA investor

    I’m interested in the relative value of CPBA (5.5%) and CPBC (13.5%). At current prices CPBA is yielding 11% whereas CPBC is closer to 15%.
    If we imagine a negative outcome with some form of external support (either from Co-op group or elsewhere), and bondholders are forced into a ‘haircut’, can we expect the holders of CPBA and CPBC to be treated equally? As both PIBS have the same principal value (£1/£100), if a 50% haircut were imposed, would CPBA and CPBC holders both expect to get back 50p on the pound? If so, CPBA looks like a much safer bet given the current CPBA price just above 50p, whereas the CPBC price is closer to par. Could this be the reason for the large gap in the current yield between CPBA and CPBC? Before the news last week the gap was only 1%.
    Does anyone have knowledge of how the holders of different Northern Rock/ Bradford and Bingley PIBS were treated? Did PIBS with different coupons receive similar offers, or was there a premium for the higher yielding bonds?

  • bengt

    With a bond it makes no difference when you buy it; If you buy it now, and shell out the extra for ‘accrued interest’ – then you will effectively get that cash back when the coupon is paid to you in June.

    Accrued interest is calculated daily – so it all works out fair and square.

    If you decide to wait until after the coupon is paid to buy, while you don’t have to pay any accrued… neither do you receive a coupon!

    Hope this makes sense


  • CPBA Bond Holder

    Yes it does Bengt I have just topped up my holding which came interest accrued from the previous holder who sold.
    If any haircut comes which it may not, CPBA is a safer bet than CPBC as nearly 50% is already factored in to CPBA £1 bond if you were to purchase at around today’s price.

  • Changing Man

    @27 Please don’t fall into the trap of confirmation bias! The Co-Op is doing what you would expect them to do I.e. glossing over their problems! Estimates of the funding black hole are now at £1.8bn and there are other horrors e. g. They have written off £150m of a failed new banking platform which they hoped would be fixed by using the Lloyds system and now that the deal has collapsed they are left with nothing. No doubt there will be further impairments to come from the failed Lloyds deal this year?
    No, on balance of all the above, my barge pole is remaining in its stocks on this “opportunity”!

  • CPBA Bond Holder

    @changing man
    You forgot to estimate their considerable assets and they own with 250 million coming in for a sale of their insurance in march.
    Britannia BS takeover has proved costly.
    Quite frankly the severe moody’s downgrade has only added to panic which is the last thing the Co-op need, they are justifies in feeling dissapointed.
    So Barclay’s got a middle east loan, RBS & Lloyds were bailed out so you now think that Co-operative Bank should be bailed out or forced to sell their branches, no they area long way from that happening.
    A lot of people are seeing moody’s technical assesment as being too severe or unwarranted. was only a few months ago Chancellor Osborne was approving the Co-op Bank business model.
    None of this would of happened if Co-op hadn’t put themselves in the limelight with the Lloyds branch takover; their ex-Santander CEO has paid the price.

  • Triceratops

    @CPBA Bondholder

    The relative value argument is one that makes me more comfortable holding CPBA rather than CPBC at these prices. CPBA has already fallen to the 50p range if both CPBA and CPBC holders took the same haircut that would cut £150m from the banks liabilities at a stroke. I think this is the most likely “worst case” scenario as the reputational damage of completely wiping out the bond holders would be severe and long lasting. I’m hoping it won’t come to this but some kind of contribution from us is looking likely given the £1bn+ hole that’s being talked about.

  • Changing Man

    Re 32: you have to ask yourself if it is in the best interest of Co-Op shareholders to pour £bns into the Co-op bank? After all, ring-fencing works both ways!
    Perhaps it’s a little too convenient to blame an ex Santander man for their current woes? After all the CEO at the time of the takeover of Britannia in 2009 was Neville Richardson, but of course he was a Britannia man! Anyway he was unconvinced by the logic of the Lloyds acquisition so resigned and walked away in 2011 with a £4.6m payoff! Wonder what compensation Barry Tootell has negotiated? Lets hope it was in Co-op PIBS!

  • sysdevman

    The minimum trade is 1000 units, i.e a trade today would cost approx £53250 plus £2387 accrued interest – £55637. That’s for 2 years at current rate (5.556pc) until 14 December 2015. After that it will be LIBOR plus 2 pc ~ less than 3pc. Of course the bonds are approx. half price so these rates are more or less doubled.

    The question is what interest rates will be around Dec 2015 onwards.

  • prometheus


    1000 units will cost at £0.5325 = £532.5 + interest + commission.

  • Sephy

    I will be waiting for asset prices get really depressed i.e 30% yields. Then it might be worth a small punt.

  • sysdevman

    #36. prometheus

    According to the LSE the unit of quotation is 100 and the minimum denomination is 1000. (Is that 1000 x100?)

    Charles Stanley informed me that the minimum was as I stated above.

  • msmumble

    #38 Sysdevman

    It is as Promethius has said – and I have just bought them so there is no doubt about it.
    I think you have misunderstood the nominal value (“100”) which is 100 pence, ie £1. So, if these were trading at par value, the minimum transaction would be 1000 x £1 = £1000.
    As they are currently trading at just over half face value at around 53p, the transaction becomes 1000 x £0.53 = £530 plus fees plus acrued interest.
    I bought at 53.9p and paid £539.00 plus £20 commission plus £23.96 interest.
    I hope you are now clear on these bonds

  • sysdevman

    #39. msmumble & #36. prometheus

    Thank you both.

    I went back and spoke to the stockbrokers to ask why they bounced my trade. Their original explanationwas that the minimum order was 1000. It turns out that their online system doesn’t handle Corp bonds or PIBS correctly and these need to be purchased over the phone. What they said was that the online order wasn’t an exact multiple of 1000 and the calculations were a bit squiffy.

    A shame because the price I was quoted was 53.2p. Let’s see what happens next week.

  • Paul Claireaux

    FS accountant talks greate sense – and is ignored. Classic.

    So let’s repeat – even if the bank PIB holders are bailed by the parent group (BIG IF) there’s a good chance of a further 50% capital loss.

    And if it’s not then the potential loss is 100%.

    How many investors in these things really understand these risks rather than comparing the running yield to their local building society deposit rates ?

    QE has certainly driven investors up the risk curve in search of yield. And my guess is that quite a few investors will come scuttling back down the risk curve after a few more of these scenarios.

  • Chris N

    be greedy when others are fearful !
    the idiots at Moody’s have compelled many fund managers to dump these bonds because they must hold investment grade securities. this causes a massive and disproportionate sell-off
    the coupons on these bonds are cumulative so even a temporary halt won’t do harm and the implicit government backing of the banking sector means the risk of default is much lower than fundamentals might suggest
    NRAM have tried to bribe bond holders to sell at various prices over the past three yrs and every time they have had to up the offer, but I’m still holding for a better deal
    I think the CPBC is the better gamble – 13% coupon for the next two years then Co-op will redeem at par and you can now buy at 90-95 !

  • Bond newbie

    The idea of investing in bonds is a new one to me. I have a few shares held in my bank sharedealing account but can’t trade bonds. For a seasoned investor this may seem like a foolish question but if someone could enlighten me as to where I can get an account to trade bonds without incurring ongoing charges I’d be most grateful. (links to any other useful info for a newbie would also be appreciated) Thanks!

  • Mark Taber – Fixed Income Investments

    There are significant risks here which investors need to be aware of. I have done a write up on my website at:

  • Warun Boofit

    The spread on the CPBA seems to be 5 to 8% which seems excessive but possibly this is normal for bonds ? I am not a bond investor normally but went ahead with this having first studied the risks mentioned by previous posters and Bengt . My normal investments ( or would be abnormal and even stupid to some people ) are in AIM oilies like AEY , SAC etc . Risk is relative so I consider CPBA to be low risk by what is normal to me but for someone whos main investments are in a building society deposit account then yes a subordinated bond is a relatively high risk .

  • Changing Man

    Reading the financial press this weekend it looks like the “black hole” in the Co-op bank’s finances may have been drastically underestimated – more like £4 billion! ( is this a surprise?). Talk is now of bond holders taking part of the pain! Does this still look like a “bond for the brave” or the foolish?

  • shebii

    Hi Changing Man can you tell me what paper/s you read the $4 billion from (I have seen articles on the haircut).


  • Changing Man

    Re 47:
    Sorry I didn’t come back here to answer your question but its all water under the bridge now! Junior bond holders are now proposed to be bailed in and the price has dropped 17% today. The proposition of buying theses bonds after the Moody’s downgrade was entirely misguided and those that were influenced to buy them by this article and ignored the scepticism expressed above are counting the cost today!