The Rise of Cooperatives & Employee Ownership

The Rise of Cooperatives & Employee Ownership – despite recession and Co-op Bank woes It is easy to feel despondent about the state of the world, the UK and wider economy, unemployment, especially high among youth. Below is a commentary about the Coop Bank, but it seemed clearer to put this into a broader context about the health of both the Cooperative Group (which owns the Bank) and the cooperative movement in general. The international picture Cooperatives are growing worldwide, a billion people are now members of cooperatives, including immediate family members makes 4bn people, over half the world’s population who benefit from the cooperative way of working.  The FAO, the Food & Agriculture Organization of the United Nations said: “Nearly one in seven people suffer from undernourishment, yet the world has the means to eliminate hunger and fuel sustainable development…one of the necessary steps to achieving food security is to support and invest in cooperatives, producer organizations and other rural institutions….” In the UK Here in the UK, the growth in both Employee Owned companies and cooperatives has been momentous in the last few years, especially visible since the financial crisis in 2008.  Employee owned businesses have both grown in number and turnover throughout the financial and banking crises.  The Employee Ownership Association recently announced that its membership had doubled over the last year and pledged to make more firms and employees aware of the options to convert existing businesses as well as start ups into employee ownership.  If the UK economy had performed as well as both the cooperative and employee owned sectors, then the UK would not have had a double dip recession and be experiencing such low growth now. The Cooperative Bank This was formed out of the Cooperative Group in 1872 and only became a clearing bank in 1975.  Its strong consumer led ethical policy and long term investment approach helped it go from strength to strength.  The external pressure to take on the troubled Britannia Building Society; the government backed Lloyds TSB deal (which did not proceed) and the desire to become bigger quickly, to create critical mass, have now put a critical strain on the Bank.  The current problems are a setback but should be seen against the problems faced by most of the largest banks in the UK since 2008.  Hence there is confidence that solutions will be found, with the backing of parent company, The Cooperative Group, and the government’s lack of appetite for another banking failure. Castlefield investment manager, Simon Holman comments: “Following on from the admission that the Co-op Bank faced a significant capital shortfall (largely as a result of loan losses from its Britannia acquisition), a £1.5bn capital raising exercise has been announced in order to fill the hole. These funds will largely be raised from the following sources:     First, the parent Co-op Group will see its existing equity in the bank wiped out; next, the Co-op Group will raise around £500m of debt, to be invested into the bank as new equity. Finally – and controversially – some of the existing bondholders in the bank will have their debt converted into Co-op Group debt, implying a restructuring that would generate about £500m of capital – and therefore represents about £500m prospective losses for this group of current bank bondholders. No-one likes having losses forced on them and there is an argument that many private investors in the Co-op bank’s bonds need income and will suffer adversely as a result of this proposal. This is likely true – but it is important to note that deposit accounts are remaining intact at the current time, while the Co-op Group is also aiming to avoid being forced to sell off any of its core businesses to plug the shortfall. We understand the importance to its members that the Co-op Group can maintain its valuable presence in services such as funeral parlours and its supermarkets. In summary, the picture is not yet definitive and there are likely to be challenges on several fronts. However, management are clearly taking steps to address the issue and ensure that the bank’s regulatory requirements are met. The apparent timescale is for the financing package to be completed in November, which means that we can expect more headlines in the meantime as interested parties fight their corner. As is true for any UK bank, depositors should be mindful of the £85,000 guaranteed limit “ Summary It is prudent to spread your money between different deposit accounts, to take advantage of the government protection scheme, if you are fortunate enough to have more than £85,000 on deposit. Posted by Brigid Benson – July 2013 SGNewsltr/170713