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Moody's downgrades Co-op Bank ratings _ again

Danica Kirka, Associated Press

LONDON (AP) -- Moody's has downgraded its ratings on Co-operative Bank for the second time this year on Tuesday — another blow to the troubled lender.

It said it had reduced the bank's debt and deposit ratings from Ba3 to Caa1.

The move pushes the Co-op's ratings further into junk status, which could make it more expensive for the bank to raise capital in the markets.

It also comes a day after the Co-operative Group, Britain's biggest mutual business, announced a rescue plan for its bank. It pledged to fill a 1.5 billion pound ($2.3 billion) hole in its balance sheet by converting some bonds into shares, which will be listed on the London Stock Exchange.

The rescue came after banking regulators demanded the bank shore up its capital base so it could absorb potential losses over coming years. But the member-owned institution had been hamstrung in efforts to raise fresh capital, and needed to turn the markets for money.

By forcing the bank bondholders to exchange their debt — 1 billion pounds this year and 500 million pounds in 2014 — for shares, the bank doesn't have to ask the British government for a bailout. In 2007 and 2008, several UK retail banks, including Royal Bank of Scotland and Lloyds Bank, had to be rescued with taxpayer's money.

The bank described the downgrade as "entirely anticipated."

"We expect the rating agencies to improve their ratings in due course upon successful completion of the exchange offer," the bank said in a statement.

Co-op said the bonds to shares plan will enable it to move forward on a stable footing, serving its retail customers and small businesses.

However, Moody's said there is a lack of clarity on the bank's future.

"The announcement confirms Moody's view that the Co-operative Bank may only return to being a fully solvent, operational entity through a substantial recapitalization," the agency said in a statement.

The bank's difficulties stem from bad commercial loans taken on in the 2009 merger with Britannia building society.

Worries about the bank emerged after it pulled out of a deal to buy some 630 branches from another U.K. lender, Lloyds Bank. It also stopped lending to new corporate customers as it attempted to repair its finances.