The Co-operative Bank has unveiled a rescue plan to plug the £1.5 billion ($2.4 Billion) hole in its balance sheet.

The financial plan to strengthen the banking group’s balance sheet is in agreement with the Prudential Regulation Authority, the Bank of England’s new banking watchdog.

The Co-operative Bank

Plan Unveiled By The Co-operative Bank

The plan unveiled by the Co-operative bank would involve the bank’s shares to be listed on the stock market for the first time. This historic rescue deal to raise £1.5 billion will force the bank’s bondholders to take losses on the investment.

The proposed bail-in process would entitle bond holders to shares in the bank. Besides, the proposed deal would result in a stock market listing for the bank.

The proposed plan would involve holders of about £1.3 billion of group debt swapping it for shares in the bank and bonds in the group. The Co-operative bank also said potentially there would be a new bond issued by the bank into which a portion of the existing debt would be swapped.

Interestingly, the Co-operative bank has not provided additional details relating to the price level at which the exchange would be made. The Co-operative bank however indicated that the price level details would be made available when the exchange offer takes place in October. Some investment bankers expressed frustration in not getting the full details till October.

In additional to the above, sale of the group’s insurance business besides amount saved on servicing the existing debt would provide an additional £500 million of fresh capital next year.

These initiatives would enhance the bank’s core tier one capital ratio above 9 percent by the year-end.

In January, the Co-operative bank’s core tier one capital ratio stood at 6.7 percent, less than the U.K. regulator’s mandated 7 percent.

The Co-operative bank was earlier owned by the mutual Co-operative Group, comprising pharmacy chains, grocers and funeral homes. The bank is expected to be transformed into a listed company on the stock exchange in October.

Six-Notch Downgrade

Last month, the Co-operative bank saw an unprecedented six-notch downgrade to junk by Moody’s that sent trading in the bank’s bonds into turmoil.

Exuding confidence with the proposed plan, the bank’s chief executive Niall Booker indicated that the proposed credible plan would address the capital shortfall and help facilitate the bank to focus on bringing down the non-core assets besides restructuring the core bank.

Interestingly, till April, the Co-operative bank has been nurturing its ambition to acquire over 600 bank branches from Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) to triple its network size. However, this move was scuttled after it was noticed that the bank had a £1 billion capital shortfall, thanks to its bad loans exposure germinated through its acquisition of Britannia building society in 2009.