The Co-operative Group has been dealt a double downgrade blow by Standard & Poor’s and Moody’s.
The downgrades come just days after the society revealed a bail-in plan to plug a £1.5bn hole in the finances of its banking business.
Standard & Poor’s downgraded The Co-op Group to BB- from BB+ over fears the bail-in would “increase the trading group’s leverage and could, in our view, put pressure on its financial covenants”.
“The downgrade reflects our view of the new management’s recent decision to incur debt at the trading group level to support the bank in its capital requirements,” it said in a statement.
“We believe the trading group would have limited capacity to provide any further capital support to the bank once this transaction is completed and in our view no meaningful capacity to support the bank’s liquidity”
Standard & Poor’s
“Management has stated that the financial services business remain, in effect, ring-fenced from the rest of the group, for regulatory purposes. In any case, we believe the trading group would have limited capacity to provide any further capital support to the bank once this transaction is completed and in our view no meaningful capacity to support the bank’s liquidity.”
Last month, Standard & Poor’s warned the Co-op Bank’s problems “could impede the group in the execution of its financial objectives”.
Moody’s, which downgraded the Co-op Bank to ‘junk’ status last month, yesterday downgraded the bonds that will be used to shore up its £1.5bn finance hole.
It warned investors in the bonds would “only be able to recover between 35% and 65% of their original investment”.
It added: “The announcement confirms Moody’s view that the Co-op Bank may only return to being a fully solvent, operational entity through a substantial recapitalisation, which as proposed would involve a bail-in of junior creditors, together with a very significant restructuring of the bank’s operations.”
Meanwhile, the Co-op Bank is reassuring customers that its bail-in plan will not affect mortgage, current account or savings customers.
“The announcement is our plan to meet regulatory requirements on capital and clearly set out our commitment to serving individuals and small business customers,” it told customers on its website. “The Co-op Bank has a strong future as a responsible, community bank with an ethical heritage, focused on its retail and SME customers.”