Aurelius reverses out of stake in Co-op after Flowers allegations

The hedge fund that was instrumental in forcing the Co-operative Bank to abandon its mutual structure and list on the stock exchange has walked away from the struggling lender.

Aurelius Capital Management, the biggest hedge fund involved in the Co-op Bank's recent debt restructuring, has sold virtually its entire interest in the lender, according to three people familiar with the process.

The sale to Perry Capital, a London-based hedge fund took place within days of the Co-op Bank becoming engulfed in a series of lurid allegations over its former chairman, the Reverend Paul Flowers. He was filmed apparently buying crystal meth, cocaine and other illegal drugs and is under investigation by the police.

The Co-op admitted on Thursday that recent events "may have caused some brand and reputational damage" to the bank and may also have contributed to a recent loss of current account customers.

Aurelius snapped up the Co-op Bank's bonds after a severe capital shortage emerged at the lender in the summer. Along with several other hedge funds, including Silverpoint Capital and Beach Point Capital, it built a blocking stake in the bonds, which it used to secure a far better deal for creditors than had originally been offered by the bank.

People familiar with Aurelius's decision to sell said it had offloaded the bonds because they had performed strongly after the restructuring deal was announced.

The Co-op agreed last month to hand the investors in the lower tier two bonds a 70 per cent equity stake in the bank as part of a sweeping restructuring aimed at plugging a £1.5bn capital hole.

Perry Capital is locked into the terms of the restructuring, and will also have to support a legally binding agreement to support the bank's ethical policies.

News of the sale comes as thousands of the Co-op's creditors are preparing to meet Friday's first-round deadline to vote on the bank's restructuring.

People involved in the process said the mutual had secured early support for the debt exchange, with the small number of votes that had been received so far coming in strongly in favour.

Securing support from creditors is vital to avoid the collapse of the bank.

The biggest hurdle for the Co-op has been mobilising its 10,000 or so retail investors, who own about £170m of low-ranking bonds, to vote. Many of these investors are pensioners, who have had to decipher complex legal documents. The Co-op needs two-thirds of these retail investors to take part in the vote, and requires the support of three-quarters of those that do vote.

LT2, a group of hedge funds and other investors, on Thursday pledged its support for the restructuring, after asking the Co-op to make a last-minute amendment to the terms.

The change is intended to close a loophole that was providing an opportunity for brokers and traders to undermine the new equity issuance by submitting claims for larger numbers of shares than they were entitled to. This could have meant that the LT2 group ended up with a smaller equity stake than they expected.

"The LT2 Group confirms its support for the recapitalisation of the Co-op Bank and . . . is fully supportive of the new management team for the bank," it said.

Aurelius could not be reached for comment while the Co-op Bank declined to do so .

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