Stricken Co-op bids to plug its shortfall

Half-year results from the Co-operative Group and its stricken banking arm will take centre stage this week, while under-pressure support services firms G4S and Serco also report

The Co-operative Bank
The Co-operative Bank

Half-year results from the Co-operative Group and its stricken banking arm will take centre stage this week, while under-pressure support services firms G4S and Serco also report.

More details of the Co-operative Bank’s woes will be unveiled on Thursday when it posts its first set of figures since being thrown into turmoil after revealing a mammoth hole in its finances.

Parent company the Co-operative Group will point to more turmoil in its banking arm as it attempts to convince investors that a punishing �1.5bn fundraising is the only way to plug its shortfall.

The mutual’s new boss Euan Sutherland was given a baptism of fire when, within days of taking over in May, the bank’s debt was downgraded to junk by ratings agency Moody’s and it uncovered the huge hole in its balance sheet.

The Co-op’s half-year figures are expected to show more deep losses triggered by impaired commercial property loans from its disastrous acquisition of the Britannia Building Society.

These sent the group plunging to a £673.7m loss in 2012.

The Co-op is expected to slash the value of the bank to zero in coming months and could also reveal hundreds of job losses when it updates on the painful restructuring later in the autumn. Its £1.5bn rescue needs the backing of investors through a “bail-in”.

Bondholders ranging from pensioners to US vulture funds must accept losses on their investments if the deal is to progress.

The bail-in will raise £500m of capital by offering bondholders shares via an “exchange offer”, resulting in a stock market listing for the group’s banking arm.

The Co-op is also sharing the pain by selling its insurance businesses and raising new debt. But it must also bolster its finances by slashing costs, with some of this expected to come from job losses among the bank’s 10,000 staff.

The Co-op considered dumping the bank into the State’s resolution scheme for failed lenders, but decided against this damaging move, which could have wiped out bondholders completely.

The black hole in the Co-op’s capital reserves largely stems from commercial property loans acquired through the merger with Britannia in 2009.

Support services groups G4S and Serco will reveal the impact of high-profile rows with the Government when they publish first-half results.

The fallout from G4S’s 2012 Olympics staffing failure was compounded when a new scandal emerged earlier this year around overcharging for electronically tagging offenders.

Auditors found both G4S and Serco overcharged the Government by “tens of millions of pounds” by billing for tagging offenders who were back in prison, had their tags removed, had left the country, had never been tagged in the first place or had died.

The audit revealed that overcharging began at least as far back as the start of the current electronic monitoring contracts in 2005 – but could have dated as far back as the previous contracts let in 1999.

Both Serco and G4S then withdrew from the competition for a new tagging contract, which has since been handed to four firms including their major rival Capita.

G4S, which reports on Wednesday, is no stranger to controversy after its 2012 Olympics contract fiasco.

It was left nursing losses of £88m after it failed to provide all of its 10,400 contracted employees last year, prompting extra military personnel to be called in to fill the gap.

Serco faces a forensic audit while G4S has been referred to the Serious Fraud Office.

Investec Securities analyst Gideon Adler said Serco, which reports on Thursday, faces the triple threat of squeezed revenues, profit margin headwinds and cash pressures.

Despite these pressures, Serco has told the City to expect strong revenue growth for the first six months, as previous contract wins filter through. Investec expects Serco to report underlying full-year profits of £283.2m, up 4% on £271.6m in 2012.

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