Sky news reported that as part of the bank’s revival plan, it has approached distressed investment funds including Apollo Management, Blackstone and CarVal.
The portfolio, known as Optimum, contains £6.6bn of mortgage loans and following the talks it is likely that a series of transactions will take place involving different structures for the assets.
The merger with the Britannia in 2009 was cited as the root of the Co-op Bank’s financial difficulties by Andrew Bailey head of the Prudential Regulation Authority.
Bailey made the comment in a Treasury Select Committee hearing in February 2014 called to investigate the collapse of the Co-op Bank’s planned purchase of Lloyds Banking Group’s assets in April 2013, nicknamed Project Verde.
The committee heard how Britannia along with other building societies such as the Dunfermline had chased higher returns than were offered through traditional prime mortgage lending in the five to seven year run up to the peak of the market in 2007.
Bailey said these lenders had strayed beyond their normal lending pattern because margins in mainstream mortgages had become heavily squeezed.
He said this was the ‘root cause’ of the failure of Project Verde.
In December last year, the Co-operative Bank fell short in the Bank of England’s stress test which was designed to test banks’ resilience against a fresh financial crisis. The test looked at a scenario which involved a 12% spike in unemployment, a house price crash of 35% and an interest rate hike.
The findings of the report on how banks performed suggested the the Co-op Bank would be particularly vulnerable to housing market stress, so its capital buffer was reset and it was ordered to submit a new capital plan.
The Optimum assets, according to the Sky News report, were partly to blame for Co-op’s failure to meet the Bank’s stress test requirements.
The Co-operative Bank was unavailable for comment.
