The top City advisers hired to find a buyer for the Co-operative Bank are in line for a £15m payday despite the struggling lender turning to its existing investors to bail it out.
Sky News has learnt that Bank of America Merrill Lynch (BAML) and UBS, which were appointed in February, negotiated the lucrative deal with the Co-op Bank’s board.
Sources said that the two investment banks would be paid between £15m and £20m – a sizeable percentage of the £250m in new equity that a group of five hedge funds will inject into the Co-op Bank.
Controversially, the investment banks’ payday will include a “success fee” despite the fact that they did not secure a sale of the troubled company to a third party.
The size of the fees being paid to BAML and UBS are said to have caused consternation among other parties involved in the Co-op Bank’s restructuring.
The payments may reignite debate about the scale of remuneration handed to City firms given that BAML and UBS are not taking any financial risk through their roles in the £700m Co-op Bank deal.
Investment banks earn lucrative fees from clients for advisory work and the use of their own balance sheets to underwrite deals such as rights issues and other capital-raisings.
The quintet of hedge funds, which include some of the biggest names on Wall Street, have agreed to rescue the Co-op Bank to avoid their previous investments being wiped out and the Bank of England moving in to wind it up.
Efforts to find a buyer for the whole of the Co-op Bank failed to elicit a compelling offer from Virgin Money, CYBG or any of the other banks or private equity firms which considered doing so.
One insider said the success fee was negotiated on the basis that it would be paid in all circumstances other than the Co-op Bank falling into a resolution process led by the Bank of England.
Last month’s announcement provided some reassurance to four million Co-op Bank customers who have faced a protracted period of uncertainty over its future as an independent business.
Existing bondholders, including retail investors, will nevertheless face the pain of seeing a substantial reduction in the value of their holdings.
Under the hedge fund consortium’s plans, they will pay £250m for new shares and swap £443m of existing debt for equity.
The funds require 75% approval for their proposal, and sources said that Invesco Asset Management, which is the largest bondholder excluding those on the ad hoc committee, has indicated that it would support them.
In addition to the new capital, £100m will be invested in the Co-op Bank’s new standalone pension scheme following tensions over the division of the £10bn scheme shared with the Co-op Group.
The current arrangement includes a “last man standing” provision which means that each side is liable for the whole scheme if the other Co-op entity goes bust.
That arrangement will be dissolved in all but limited circumstances, according to this week’s statement.
If the restructuring is completed, the Co-op Group – once the sole shareholder in the lender that carries its name – will see its stake in the Co-op Bank reduced to 1%.
Despite the reduction in the mutual’s holding, the Bank has stressed that its commitment to “values and ethics” will be safeguarded.
It added that it saw the potential to pay a dividend to shareholders in 2021 if its business plan was delivered over the coming years.
The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its original £1.5bn bailout in 2013.
The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.
The Co-op Bank’s balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.
Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.
A BAML spokeswoman declined to comment on Monday, while UBS could not be reached.
The Co-op Bank also declined to comment.
Source: Sky