Co-operative Bank PLC, which is a part of the Co-operative Group Ltd, has said that it will raise fresh capital this year by offering holders of its £1.3 billion in subordinated bonds a mix of new senior debt and shares.

The bank has asked subordinated bondholders to take loses on their investments in an effort to raise £1.5 billion in fresh capital and prevent its collapse. The bank is also expected to raise further £500 million by selling loans from its portfolio and selling its general insurance unit in 2014. The bank needs £1 billion to fill the gap in its finances and the management is also considering cutting or cancelling income paid to the bond holders of the bank.

The decision would impact about 5,000 small investors who have bonds or permanent interest bearing shares (PIBS) in the bank. The bank had issued bonds to raise funds to acquire the Britannia Building Society in 2009. PIBS holders have already seen the value of their investment fall and not the interest is likely to be cut. These bonds offers an annual interest of between 5.55 per cent and 13 per cent but the bank is expected to reduce this return rate significantly to improve its financial position.

Many experts now believe that the takeover of Britannia is the main reason for the issued being faced by the bank.