Co-Operative Bank Plc said it risks failing unless bondholders approve a debt exchange to plug a capital shortfall as it posted a wider loss in the first half.

The lender is in talks with bondholders to swap some debt for equity to plug the 1.5 billion-pound ($2.3 billion) deficit and expects to make a formal offer at the end of October, Co-Operative Group Chief Executive Officer Euan Sutherland told reporters on a conference call today.

“The execution of the exchange offer is vital,” the lender, which traces its roots to Britain’s 19th-century industrial north, said in a statement. “We will not remain a going concern without it.”

Co-Operative Bank is being pushed by regulators to bolster capital after the failure of its bid for 632 Lloyds Banking Group Plc (LLOY) branches exposed the shortfall, which stems from the Manchester, England-based company’s purchase of Britannia Building Society in 2009. The lender today posted a 496 million-pound writedown, mainly due to souring loans from Britannia.

Co-Operative Bank is trying to raise the money by asking existing bondholders to exchange subordinated debt for new equity and senior debt. The lender has said it needs holders of about 1.1 billion pounds of the 1.3 billion pounds of debt outstanding to approve the plan. The bank has 7,000 bond investors with holdings of less than 25,000 pounds.

“There is no Plan B,” Sutherland told reporters on a call. “Plan A is the recapitalization of the bank; it’s being done in conjunction with the Bank of England.”

Parent Co-Operative Group is standing “firmly” behind the bank, making a 1 billion-pound contribution, he said. Co-Operative Group won’t pledge additional money, he said.

The bank’s loss after tax increased to 781.5 million pounds from 45.3 million pounds in the year-earlier period. The company also wrote down its computer systems by 148.4 million pounds and set aside 61 million pounds to compensate customers mis-sold products including payment-protection insurance.

(Source: Bloomberg)