Co-op results show mutual is in existential crisis

For the past 12 months much of the attention over the mutual has focused on its banking arm, now controlled by its bondholders after the discovery of a £1.5bn black hole that saw the lender come close to collapse.

The Co-op has yet to make good on its share of the bail-out bill, which will require it to pump £263m into the bank by the end of the year. On top of this, it will have to borrow a further £120m from its banking syndicate if it is to maintain its 30pc stake.

As the mutual’s annual report shows, much of the money spent recapitalising the bank has been effectively written off, with the Co-op valuing the business in its accounts at just £735m, about half the value of its recapitalisation.

Whether it is able to convince its banks to lend it this money, if it actually tries, is looking increasingly unlikely as the problems in the mutual’s core operations, especially retail business, become clear.

Year-on-year, operating profits fell by nearly a third from just under £300m to £210m, while retail saw its profits fall by £22m to £247m amid intensifying competition among Britain’s big supermarket chains.

The scale of investors’ fears about the Co-op is highlighted by two bonds sold by the group in December that paid interest rates of 11pc, roughly double what is on offer from the average junk bond issuer.

“That is a huge rate of interest to pay and shows that Co-op desperately needed the cash and also that note holders demanded a very high rate to protect them against Co-op defaulting,” said Louise Cooper, a long-time City analyst.

Next month, the Co-op will vote on outline reform proposals currently being finalised by Lord Myners, who resigned earlier this month as the mutual’s senior independent director amid criticism of his plans. Many in the mutual are against the former City minister’s medicine, but without radical change they might get something far worse.

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