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Overview Strategic report Corporate governance Risk management Financial statements Other information Notes to the Bank financial statements continued For the year ended 31 December 2013 All amounts are stated in £m unless otherwise indicated 4. Recapitalisation and the Liability Management Exercise In plain english: This note provides details of the Liability Management Exercise which was completed in December 2013 and the significant impact it had on the Bank’s capital and reserve position. During the year the Bank carried out a significant refinancing exercise with the aim of increasing the level of capital held. This exercise involved issuing new shares and new debt in exchange for cash and extinguishing existing debt and preference shares. The background to this is discussed in the Capital Management section. The Bank announced, in November 2013, a Recapitalisation Plan to generate £1.5bn additional CET1, which was discussed with the relevant regulatory bodies. The key objective of the Plan was to strengthen significantly the Bank’s CET1 base with the support and participation of certain holders of the Bank’s securities and without the need for support from the tax payer. The £1.5bn Recapitalisation Plan consisted of three elements: a) The Liability Management Exercise (LME) to generate c.£1.2bn of new CET1; b) The commitment of The Co-operative Group to contribute £333m of CET1 by the end of 2014; and c) £40m of CET1 generated in 2014 from interest savings on the securities surrendered in the LME. The transaction has been accounted for in accordance with IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments. Details of the Liability Management Exercise a) The LME A core part of the Recapitalisation Plan was achieved through successful completion of the LME on 20 December 2013. This involved the following elements: i. The issuance of £0.2bn of new subordinated debt and £0.6bn of new ordinary shares in exchange for £1.3bn of existing debt and preference shares and additional contributions from bondholders of £0.1bn; ii. The cancellation of £0.4bn of existing ordinary share capital, which resulted in the creation of a capital redemption reserve of the same value; and iii. The sale of investment assets that were used as economic hedges for the existing debt, generating a profit of £11.1m. These assets had been accounted for as available for sale, and therefore there was an equivalent reduction in the available for sale reserve. b) The contribution of £333m by The Co-operative Banking Group. This is due or paid up as follows: i. £20m paid in December 2013; ii. £50m paid in January 2014; iii. £100m due by 30 June 2014; and iv. £163m due by 31 December 2014. c) The balance of the £1.5bn is £40m of savings in 2014 generated on securities surrendered as part of the LME Elements a) and b) together created additional CET1 in the following ways: i. New ordinary shares – a total of £0.8bn of new ordinary shares were issued to both existing bondholders and The Co-operative Banking Group. This was recorded as share capital and share premium as shown in the table below. ii. Income – £0.7bn was recognised in the income statement. This arose because the amount of debt extinguished and contributions received (£1.3bn and £0.4bn) was greater than the amount of the new debt and shares issued (£0.2bn and £0.8bn). In accordance with company law, which requires that share premium is determined by reference to the amount of debt extinguished, the element of income relating to new shares issued (£0.6bn) was transferred from retained earnings to share premium. The Co-operative Bank plc Annual report and accounts 2013 155
Overview Strategic report Corporate governance Risk management Financial statements Other information Notes to the Bank financial statements continued For the year ended 31 December 2013 All amounts are stated in £m unless otherwise indicated 4. Recapitalisation and the Liability Management Exercise continued iii. These increases in CET1 were offset by associated costs of £52m. The effects of these transactions are shown in the table below and can be seen in the statement of changes in equity on page 133, along with the other borrowed funds and share capital notes on pages 182 and 205. Overall impact of the recapitalisation transactions The table below shows the effect of the recapitalisation transactions on profit and reserves. The effect on regulatory capital is shown on pages 119 to 121. Effect of the Recapitalisation Plan on profit and reserves Profit Share capital Share premium Effect on reserves Available for sale reserve Capital redemption reserve Retained earnings Net effect on reserves Issuance of new debt and ordinary shares in exchange for existing debt and contributions 707.7 12.5 777.5 – – 707.7 1,497.7 Sale of assets hedging pre-LME debt positions 11.1 – – (11.1) – 11.1 – Effect of transactions with a profit impact (before costs) 718.8 12.5 777.5 (11.1) – 718.8 1,497.7 Costs associated with LME transaction (30.5) – (21.3) – – (30.5) (51.8) Effect of transactions with a profit impact (after costs) 688.3 12.5 756.2 (11.1) – 688.3 1,445.9 Other LME transactions (with no profit impact): Cancellation of share capital (capital redemption reserve created) – (410.0) – – 410.0 – – Transfer of retained earnings to share premium account – – 594.8 – – (594.8) – Total effect of recapitalisation transactions on profit and reserves 688.3 (397.5) 1,351.0 (11.1) 410.0 93.5 1,445.9 This is discussed in more detail in the Capital Management section on pages 117 to 121. Coming up: The next 11 notes are all designed to give more information on our 2013 and 2012 income, expenses and the overall result as shown in the Bank income statement on page 128. You will find tables breaking down the numbers into more detail and offering further explanations. 5. Segmental information In plain english: This note breaks down the operating results (summarised in the Bank income statement) and the assets and liabilities (summarised in the Bank balance sheet) into our main business areas. This analysis is designed to help you understand how each segment has performed and how we have allocated our shareholders’ capital. In 2012, the Bank reported its operating segments as Retail, Corporate and Business Banking (CABB) and Other. The Corporate element was split into Core and Non-core. In 2013, as part of the Bank’s plan to simplify, de-risk and reshape its business and to address the underlying issues which it faced, the Bank reported its business in two distinct divisions – Core and Non-core. Core represents activity consistent with the strategy and risk appetite of the Bank. This includes the Retail, Business and Commercial Banking (BaCB), Treasury and other segments. Non-core business lines includes activities not congruent with the current strategy of the Bank which are targeted for run down or exit. The comparatives throughout the note have been restated as appropriate. Revenues are attributed to the segment in which they are generated. Transactions between the reportable segments are on normal commercial terms and internal charges and transfer pricing adjustments have been reflected in each segment. 156 The Co-operative Bank plc Annual report and accounts 2013
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