Q&A: How will investors be affected by Co-op Bank bail-in? The Co-operative Bank has announced plans to plug a £1.5bn financial hole by asking its bondholders to swap their investments for shares in the bank. The "bail-in" deal involves the bank being listed on the London Stock Exchange and means that the wider Co-op Group won't have to sell off more assets or call on taxpayer funds. IN Money Q&As Chief executive Euan Sutherland has called the rescue plan "the best solution for all concerned," but thousands of retail investors who hold the bank's subordinated debt may disagree. Who will be affected by the bail-in? The Co-op Bank's plan is to draw on money loaned to the bank by bondholders, a number of whom are small retail investors. In exchange, holders of these securities will be given shares in the bank when it lists on the stock market. Will there be any impact on residential mortgages or savings accounts? Despite its capital problems, Co-op Bank has remained competitive in the residential mortgage market through both its direct offering and its intermediary brand, Platform. However, it has exited riskier parts of the home loan market. The bank was the first big lender to stop offering interest-only loans last May and was quickly followed by others. The bank today reiterated its commitment to lending to new and existing retail customers. Co-op members who have current accounts and savings accounts will not be affected by the deal. What will happen to bondholders? More than 5,000 investors hold Co-op preference shares and perpetual subordinated bonds (PSBs), which are sometimes (and erroneously) called permanent interest bearing shares or Pibs. Many investors bought the debt when it was sold by Britannia Building Society before the mutual merged with the Co-op Bank but Co-op debt, which pays a coupon of 13 per cent a year on its par price, has also been popular in recent years with income-seeking investors. They are now being asked to sign up voluntarily to a "liability management exercise" to support the bank which will involve giving up their bonds in exchange for shares. The offer could involve a mixture of ordinary shares in the bank, senior bonds in the wider Co-op Group and some sort of fixed income product - but the details are not yet clear. The extent of the losses that investors incur depends on how this transformation occurs, and what price they originally paid for the instruments. Investors can sell their bonds in the meantime, but they risk crystallising recent losses if they do so. Prices for the Co-op's 13 per cent perpetual subordinated bonds and 5.5555 per cent subordinated bonds - both of which used to be Britannia permanent interest-bearing shares - and 9.25 per cent non-cumulative preference shares plummeted in May when Moody's downgraded the bank. Will I lose interest? Co-op has also stated that it will not pay the coupon on the 13 per cent Perpetual Subordinated Bond, expected on July 31, unless it has permission to do so from the regulator. Rik Edwards from stockbrokers Canaccord Genuity warns that this permission is unlikely and that the bank will probably not pay out further dividends or interest payments on bonds in the near future. There is no guarantee that the shares, when they are issued, will pay dividends or that those dividends will represent a yield as high as the subordinated bonds. Has this ever happened before? West Bromwich building society Pibs and subordinated bondholders lost money in a capital restructuring in 2009 and coupon payments from Northern Rock and Bradford & Bingley bonds were suspended when those providers ran into trouble. Lloyds Banking Group also restructured its preference share capital in 2009, to the detriment of some holders. But there are examples of retail investors successfully earning a reprieve from recapitalisation plans. Mark Taber at Fixed Income Investments successfully co-ordinated a campaign on behalf of investors who faced losses in Bank of Ireland subordinated debt (formerly Bristol & West Pibs) when the bank was experiencing problems. Holders of £75m in Pibs avoided a scheme to swap their junior debt for equity. Is there anything bondholders can do? Not really. Preference share and subordinated debt holders fall outside the Financial Services Compensation Scheme, so investors cannot call on this if they face losses. Investors can of course sell their junior bonds but will crystallise recent price falls if they do so. The Co-op has suggested that it will help retail investors to get financial advice - at its expense - on the debt-for-equity swap but so far nothing is certain. At the moment, the bank says it is still looking into proposals for retail investors.