Co-op Bank agrees 700 million pound rescue package

By Lawrence White LONDON (Reuters) - The Co-operative Bank <42RQ.L> said on Wednesday it had agreed a 700 million pound financial rescue package with leading investors that will shore up its capital base, ending months of uncertainty about its future. The rescue package will see the bank's existing investors swapping their bondholdings for cash and shares, boosting its capital levels back to a level acceptable to Britain's financial regulators. The deal follows months of negotiations between the bank and its hedge fund creditors after Co-op put itself up for sale in February this year, seeking its second rescue in the last five years. The bank, which prides itself on being an ethical lender, nearly collapsed in 2013 after losses from problem real estate loans and received a further capital injection in 2014 as it battled IT and governance problems. "The proposal today should lay the foundations to help secure the future of the Co-operative Bank," its chairman Dennis Holt said in a conference call with reporters on Wednesday. Co-op Bank provides banking services to almost 4 million retail and small and medium-sized enterprises in Britain. The deal will allow the bank to survive as a standalone entity, Co-op Bank said, and the agreement allows the lender to keep its name and ethical policy under which it does not lend or provide services to businesses deemed harmful to society. If the bank had failed to find a buyer or agree a rescue package, it would have posed a first test of powers granted to the Bank of England after the 2008 financial crisis -- allowing it to intervene in a struggling bank and unwind it in an orderly way. Investors who own the bank's debt will pump 443 million pounds into recapitalising its bonds and will also help it raise 250 million pounds in fresh equity, the bank said in a statement. The bank and parent Co-operative Group have agreed terms to separate their respective pension plans, overcoming a stumbling block after months of negotiations with investors as to who would be liable for the members' pensions. The bank will contribute 100 million pounds over 10 years to its section of the shared pension scheme. Co-Op Group's holding in the bank will fall to around 1 percent from 20 percent, leaving the bank's U.S.-based hedge fund owners in control. They include BlueMountain Capital, Cyrus Capital Partners, GoldenTree Asset Management, and Silver Point Capital. Britain's Prudential Regulation Authority said in a separate statement it had accepted the plan, but that implementation of it would be subject to further approvals. (Reporting by Lawrence White, additional reporting by Esha Vaish; editing by Simon Jessop and Pritha Sarkar)