Plan B leaves Co-op investors satisfied When the chief executive of the Co-operative Group laid out his proposal to rescue the mutual's banking arm back in June he insisted there was no Plan B. However the restructuring unveiled on Monday, after weeks of intense negotiations with bondholders, looked decidedly like one. The Co-op was forced to abandon its plan to hold on to a majority stake in the bank, reconciling itself instead to the fact that a group of bondholders - including about a dozen hedge funds - will own 70 per cent of the lender. Euan Sutherland, who took over as group chief executive in May this year, said he was "relaxed" at the way the restructuring had evolved. "I don't have a big ego ... it didn't have to be my plan or the highway," he said. Through the process, we got to a genuinely better plan for pretty much all stakeholders. Certainly for the thousands of retail investors who, as the lowest-ranking creditors, could have seen their £60m holding wiped out, the outcome is better than expected. This group of investors will shoulder a loss - or "haircut" - of about 40 per cent after the Co-op said their debt would be swapped for new group bonds worth about £36m. They will have the choice of sacrificing either part of their 9.25 per cent annual payment rate, or a future capital sum. The biggest group of bondholders - the lower tier-two investors, who initially threatened to block the Co-op's plan to swap their existing £937m of debt for new, lower value, bonds - also said they were satisfied with the result. This group will inject a total of £1.099bn - £125m of new cash, £937m of bonds and £38m of interest - in exchange for 70 per cent of the bank's equity and £100m of new bank bonds. The Co-op said hedge funds would account for about half of that equity slice, giving them a combined stake of 35 per cent in the bank. Unusually for bondholders of a distressed company, these investors demanded equity rather than new debt, a stance Co-op executives said reflected their faith in the recovery potential of the bank. "The investors see value in the turnround and are accessing equity at a good price," said Niall Booker, head of the bank. They believe the bank will be worth a lot more in future. Given the Co-op's dire outlook for the business - it predicted losses for at least another two years - they should not expect a quick turnround. Mr Booker outlined plans to close 15 per cent of the Co-op's retail branches as he attempts to cut its bloated 80-plus per cent cost-to-income ratio to a more manageable 60 per cent. He warned it would take up to five years to achieve the desired cost savings, strip out risk and restore the core business to growth. Much of the problems relate to the Co-op's disastrous merger with Britannia building society, which saddled it with billions of pounds of bad loans. But Mr Booker was careful not to blame the Britannia portfolio exclusively for the Co-op's woes. As well as running down a £15bn non-core division, he said the bank had to fix poor risk controls and spend up to £500m upgrading its outdated IT systems. In time, he said, the bank would be a more cautious lender, focusing on less risky mortgages and unsecured loans Co-op's executives also have a battle to convince members and customers that they will uphold the ethical values of the Co-operative movement, even as they will be under pressure to deliver returns to a new set of shareholders. Mr Sutherland stressed that the Co-op's principles - which prohibit it taking business from unethical companies, for example - would be enshrined in a legally binding agreement. He said this would strengthen the values as, for the first time, directors will have a "duty to deliver on ethics." The Co-op is establishing an ethics committee, which will meet each year to ensure its practices meet expectations. As long as the Co-op Group holds at least 20 per cent of the bank, its consent will be required to alter the bank's principles. Bondholders - including hedge funds - have said they support the Co-op's ethics and, furthermore, believe they will help the bank win customers from the big banks. "The idea that they are evil institutions is far removed from the truth," said Mr Booker.