By Mark Kleinman, City Editor
The hedge funds which stand to become major shareholders in the Co-operative Bank are drawing up a shortlist of new board directors even as they try to persuade regulators that they will not seek undue influence over the restructured lender.
Sky News understands that LT2, the group of investors which forced the Co-operative Group into a radically revised bail-out plan unveiled last week, is appointing headhunters to identify two new non-executive directors for the mutual's banking arm.
The bondholders have the right to nominate the board members under the terms of their participation in the rescue plan, according to a previously-unreported section of the prospectus published .
Co-op insiders said on Tuesday that LT2 would be seeking to identify candidates who would diversify from an ethnic and gender perspective the current composition of the Co-op Bank's board. Eight of the Co-op Bank's existing board members are men.
The search would be designed to reflect the hedge funds' support for the Co-op's ethical principles and commitment to diversity, the insider said.
A person close to LT2 said the new directors would be nominated by the bondholders but would not be representatives of the investor group.
"They will be wholly independent board members who act in the interests of all shareholders in the bank," they added. "Corporate governance at the Bank has been very poor and it is clear that more credible people with banking experience are necessary."
Under rules supervised by the Prudential Regulation Authority (PRA), a shareholder is deemed to be in a position of control if it owns more than 9.9% of a regulated bank.
The LT2 group has informed the PRA that none of its individual members will hold a stake of that size, and that LT2 itself will cease to exist if the restructuring is approved.
The Co-op Bank was stunned earlier this year when it was told by regulators that it would have to find £1.5bn to meet Bank of England capital rules.
It lost hundreds of millions of pounds on bad loans, some of which stemmed from its merger with the Britannia in 2009, and has not been immune to the wave of mis-selling scandals which have swept across the British banking industry.
The mutual had been planning to buy more than 630 Lloyds Banking Group branches in an effort to become one of the industry's leading players but was forced to abandon the plan.
The Co-op is now attempting to mobilise investors to back the plan, with some of the older bonds requiring a high turnout to ensure a valid vote.
Euan Sutherland, the Co-op chief executive, has warned that the alternative to the restructuring is bankruptcy.
"The Bank believes that, if the LME does not succeed, the only realistic alternative is resolution of the Bank under the UK Banking Act 2009 and believes that if the Bank were to enter into a bank insolvency or administration procedure following resolution, all holders of the Existing Securities would receive no recovery at all."
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