co-op bank
Co-op Bank said it is in “advanced discussions” over a possible sale Getty Images

Troubled Co-op Bank said it is in "advanced discussions" with a group of existing investors over a possible sale.

But it is understood that disagreements over funding its pension liabilities may scupper a £700m ($895m) rescue of the ailing lender.

The clutch of US hedge funds – including Silver Point Capital and Golden Tree Asset Management – behind the bailout have offered to put £200m into the bank's pensions pot, according to the Sunday Times.

However, the Co-op Group, which owns a 20% stake in the lender, believes the package is not sufficient to protect the scheme's 90,000 members.

But the Co-op Bank said today (19 June) it "notes recent media speculation", adding "that it is in advanced discussions with a group of existing investors with a view to a prospective equity capital raise and liability management exercise". It added a "formal sale process" had also begun.

It said that Bank of England's (BoE) Prudential Regulation Authority "welcomed the sale and capital raise process".

Co-op has £800m of liabilities from the Britannia pension scheme after it acquired the building society in 2009, plus a share of the £8bn Co-op Group scheme.

In April Co-op Group declared its 20% share of the lender worthless by writing down its entire value to zero, even though it continued discussions with other investors to save the business. It had previously priced its stake in the business at £140m.

The 150-year old bank, now primarily owned by US hedge funds, put itself up for sale in February after revealing a £1.5bn black hole in its balance sheet four years ago, from which it is still trying to recover.

Co-op bank, which has four million customers, reported an annual loss of £477m in March, bringing its cumulative losses over the last five years to more than £2.7bn.

Since failing the Bank of England's stress test in 2014, Co-op bank has been closely watched by regulators while it tries to restore its capital to an acceptable level.