The lure of gold, the deceit of silver

It seems the Co-Op Group's proposals for resolving the mess its bank has got itself into have been firmly rejected by the bondholders. More specifically, they have been blocked by an unholy alliance of two hedge funds - Aurelius Capital Management and Silver Point Capital. These two put in a counter-proposal, which it seems (after extensive talks) has been accepted by the Co-Op Board. Robert Peston announced on his blog that the Co-Op Group was about to lose control of its bank.

But that's not what Euan Sutherland says. Proudly proclaiming that the Co-Op Group would retain a 30% stake in the Co-Op Bank, making it the largest shareholder, he claimed that the Co-Op Group would remain in control of the bank.

I fear this is more Co-Op Group spin. I've complained before about the less than transparent way in which the Co-Op Group communicates with its stakeholders, which at times has amounted to outright deceit. The fact is that a 30% shareholding is in no way a controlling stake. The Co-Op Group can only remain in control of the bank if the other shareholders allow it to - and in particular, Aurelius and Silver Point. So far, they are playing nice. But customers and other stakeholders should not be fooled. They are by no means as friendly as Sutherland implies.

Aurelius Capital Management (not to be confused with the German private equity firm Aurelius AG) describes itself tersely as "A private investment firm". However, press reports about its activities give a clearer indication of its true nature. Aurelius is one of the hedge funds involved in the long-running legal battle over the restructuring of Argentina's debts. Nor is this the only legal battle in which it is currently involved. From the South California Public Radio's report into the delayed bankruptcy of Tribune, the company that owns the LA Times (my emphasis):
The Tribune bankruptcy, given the sheer volume of the distressed debt, is right in Aurelius' wheelhouse, however. The hedge fund's playbook is to force its Chapter 11 opponents to endure protracted legal combat. Unlike Oaktree, which would wind up owning a piece of the post-bankruptcy Tribune and presumably be able to dictate the future management of the company (making it more of a private-equity player in this case), Aurelius is in it for the money. 
It seems Aurelius is in the habit of using litigation to force distressed debt holders to pay up. And this press release from Aurelius regarding another of its high-risk investments, IVG Immobilien, shows just how tough it can be when it is on the hunt for money (and note that this situation, like the Co-Op Bank's, involves convertible debt instruments). It is, in short, a predator.

Like Aurelius, Silver Point Capital's website says very little about it:
Silver Point Capital L.P. is a registered investment adviser focused on credit and special situations investments.
The firm, based in Greenwich, Connecticut, was founded in 2002 by Edward A. Mule and Robert O'Shea.
But that last line speaks volumes. Mule and O'Shea were formerly at Goldman Sachs, where they were experts in distressed debt and corporate restructuring. And they have become known as aggressive players in the high-yield distressed debt market. Hedge Fund Letters describes Silver Point thus (my emphasis):
Akin to their investing experience at Goldman Sachs, the firm tirelessly seeks complex situations where they can capitalize on their fundamental analysis skills and proactive style of investment management, especially with restructuring and distressed situations. 
In recent years, Silver Point has profited from high profile failures of financial institutions, including Lehman, MF Global and the Icelandic bank Glitnir. It also made money from the collapse of the Madoff ponzi empire. Currently, nearly half of Silver Point's investments are in financial industries, including equity stakes - often arising from conversion of hybrid instruments. They have history, it seems - and the Co-Op Bank is just their kind of acquisition.

Both Aurelius and Silver Point bought their stakes in the Co-Op Bank in the aftermath of the Moody's downgrade when the price of its hybrid debt securities collapsed. Both are unquestionably in it for the money. And both play hardball to get what they want. So why have they conceded control of the bank to its existing management?

Well, actually it makes sense. Were this a private equity takeover, we would expect to see the management replaced and an immediate restructuring programme put in place. But these are hedge funds, not private equity firms. They don't want to run a bank - they just want to make money from it. And the Co-Op is a rather unusual bank. It has an exceptionally loyal customer base, many of whom have chosen it because of its commitment to "ethical" investment, which at the moment is unique in the market place. It also has strong links with other financial firms such as credit unions and small building societies, to whom it provides payment services. And its link with a mutual makes it popular not only with customers but with government. None of this would be lost on Aurelius and Silver Point. For them to run the bank directly would destroy its unique selling points, making it difficult for it to compete in a cut-throat financial services marketplace and eliminating any likelihood of a return to profit any time soon. This is certainly not what these companies want. So it is in their interests for the Co-Op Group to remain apparently in control of the Co-Op Bank.

But make no mistake, Sutherland and his fellow Board members will be on a very short leash. They must return the Co-Op Bank to profitability within a very short time - otherwise the hedge funds are likely to turn nasty. They will not hesitate to asset-strip the Co-Op Bank if the management fails to meet the profitability targets that they expect. And as between them they DO have a controlling stake, they can unquestionably do this. Sutherland's statement was made with a gun to his head.

The Co-Op Group may appear to be in control of its bank, but in reality it is a puppet. And the puppet masters are sharks.

Related links:
Under the Radar - Coppola Comment
Stand By Your Bank - Coppola Comment
Co-Op Group to lose control of Co-Op Bank - Robert Peston, BBC
Co-Op Bank bondholders set to seize control - FT (paywall)
The Co-Op mess, and bondholder ethics - FT Alphaville
"This bank will remain the Co-Operative Bank" - FT Alphaville

Silver P


  1. So it is conceivable that the Co-op could lose the only thing that realistically justifies its existence (its ethics) should it not return to profitability; that is, is it conceivable that we'd see its full scale downfall after the faceless vultures have had their share?

    Then it truly would be the end of an era, along with hope for many on the left for a workable capitalist-socialist enterprise...

    1. I don't see how the Co-Op Bank can return to profitability in anything resembling its current form. Given that, I don't have much faith in its long-term survival.

  2. Francis
    You are one for laying on the horror.
    I remember you saying in another blog that the bondholders would be offered a Sutherland's deal or nothing and rejecting my suggestion that a much better deal would be available particularly once my "powerful friends arrived". Well, they did arrive and we small bondholders will have a better deal and other options instead of the dictates of the conceited Sutherland.
    You seem determined to cast the hedge funds as the devils in carnate and will no doubt warn that we must supp with these devils from now onwards. However, it is better to deal with the devils whose behaviour you know ( live in fire, smell of sulphur and eat people before breakfast etc.) than the chaotic and incompetent directors of the Co-op Bank and Group who might do anything on a whim without proper planning and with little control the outcome was always uncertain. The improved quality of the directors will offer a path to recovery for the bank. Consider some of the previous Board members - a plasterer, a fireman, a farmer chaired by a Methodist minister. In the end the plasterer got plastered, the fireman became incandesant, the farmer ploughed his own furrow and the minister faced Armageddon, no surprise the bank failed, in reality it was just a question of when? Myself, I would rather supp with the devils from the hedge funds than the incompetents BUT there is a time to be in and there will be a time to be out for all small bondholders or small shareholders just do not hang in there too long once the bank is a going concern again.

    Very best regards

    Old Nick

    1. Yes, the small bondholders do better. But I am not solely concerned with small bondholders. I am also concerned for customers. And predatory hedge fund like these are not good news for customers, or indeed for the hundreds of people employed by the Co-Op Bank.

      This deal does not involve changes to bank management. You will still have to deal with Sutherland. But he will be even less interested in you than he is now. His sole aim will be to keep the hedge funds happy, and he will do whatever it takes to achieve that even if it is not in your interests. Haven't you realised that the only reason you were offered a better deal is because the hedge funds needed your support to overturn the Co-Op's original proposal without forcing the bank into resolution? You are a means to an end, that's all. Aurelius and Silver Point are no more interested in you than Sutherland. Probably less, actually.

      I do not think this bank has a long term future, and I fear that at some point your investments really will be toast. You've been reprieved this time. Don't bank on it happening again.

    2. Frances,

      It may not involve changes to management but look at the rats who are rapidly fleeing.

      Whilst it is all nice and fluffy to have an "ethical", Co-operative Bank. Incompetent Management (not just the merger but the write offs of IT, Verde costs - all of which were crammed on to the Bank) does not build a successful bank and unfortunately you need a successful bank if it is going to be able to operate at all.

      Add on the lies of management (not revealing the capital deficits, issuing bonds whilst covering this up) - possibly aided by the inept regulators and you have a very duplicitous organisation.

      So the hedsge funds have come in and "won the day". Great. They know how ot make money, the bank should be stronger and they arent daft enough to forget that the "happy clappy" tag does appeal to some customers.

    3. Darren,

      I don't disagree with your analysis of the Co-Op Group's management at all. I've been severely critical of them myself in previous blog posts - see the links at the end of the post, and these two:

      However, the point of this post is that the hedge funds' interests are not necessarily those of either the Co-Op's customers or its other stakeholders. People should be extremely wary of their intentions. They are not fundamentally interested in rescuing the bank, and they certainly won't wait patiently while it undergoes a slow and painful restructuring: their sole aim is to make money fast, and they will do so by destroying the bank if that gives them the largest and quickest return.

    4. Frances,

      In stark disagreement with both you and Old Nick Heavenly on this one. You have been far too kind to the financial scum that are vulture funds. They are working in cahoots to asset strip every last cent possible from the banks and as many customers as possible. Failure is their aim whilst duping as many idiots as possible into their scam.

      That these vultures are even legal is a damning indictment of regulation. That some people may think the vultures will offer a better deal than even incompetent management is a damning indictment of their stupidity. I speak as one with "skin in the game".

      The vulture scum have but one aim and that is to take as many to the cleaners as possible. The law protects them because they wrote the laws and then lobbied for them. They had no interest in the Co-op until they willing purchased it with ulterior motives.

      There is no language available to describe this vermin properly, but you have been warned.

    5. Crikey. I didn't think I had been kind at all. This post was intended as a warning to the naive bondholders of Co-Op Bank who think they have been rescued from Co-Op Group mismanagement and the future is rosy. In my view they couldn't be more wrong. Frying pans and fires spring to mind.

  3. I would like to hear exactly what the hedge funds have said about all of this. Are there bits which can be quoted?

  4. I would like to hear exactly what the hedge funds have said about all of this. Are there bits which can be quoted?


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