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NEW YORK (TheStreet) -- Hedge funds set to become the leading shareholder group in Co-operative Bank plc have asked to change the terms of a rescue restructuring to stop speculative investors with small bond positions grabbing stock on the cheap.

The Prudential Regulation Authority has given Co-operative Bank until year-end to plug a 1.5 billion pound ($2.45 billion) capital shortfall, and earlier this month the lender, a unit of Manchester, England mutual Co-operative Group Ltd., agreed on the terms of a debt restructuring with three key creditor groups.

These include the LT2 Group, which holds about 48% of the bank's 954 million pounds of Lower Tier Two securities and is set to emerge with more than 35% of the lender.

Co-operative Group on Thursday, Nov. 27, said this group wants the wider Lower Tier Two creditor class to end up with about 56.7% of the bank's equity, instead of 45%, after a debt swap. At the same time LT2 Group wants the price of a new stock issue that it is underwriting and which is open to all Lower Tier Two creditors raised to 375 pence per share, from 200 pence. The size of the issue would fall to a 13% stake, instead of 25% under the terms agreed on Nov. 4.

Sources said Thursday that the change is designed to stop speculators "gaming the system" to gain Co-operative Bank stock at a preferential price given that the LT2 Group is shouldering much of the risk.

"People could use a small bond holding of a limited size to get exposure to the open offer, which has better terms than the exchange offer," one person said.

LT2 Group insisted Thursday that it still backed the restructuring, which had last week appeared in doubt after escalating allegations about the bank's former chairman prompted a raft of investigations and appeared to threaten the bank's franchise.

"The LT2 Group confirms its support for the recapitalisation of the Co-op Bank and for the proposed amendment to the scheme of arrangement as set out in the announcement made by the Co-op Bank today. The LT2 Group is fully supportive of the new management team for the Bank led by the recently appointed chairman and chief executive."

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The 12-member LT2 Group includes Aurelius Capital Management LP, Silver Point Capital LP, Beach Point Capital Management LP, Caspian Capital LP, Canyon Capital Advisors LLC and Monarch Alternative Capital LP.

Co-operative Group said Thursday it will only ask the High Court to approve the modifications if the LT2 Group gives its firm agreement to back the restructuring under the amended terms, which the group has indicated it will do.

If the High Court refuses to agree to the changes, those creditors will still be bound to vote in favor of the scheme of arrangement restructuring, it said.

The mutual also admitted that an investigation into the lender commissioned by Chancellor of the Exchequer George Osborne and separate probes by the Financial Conduct Authority and the PRA will take their toll on the bank's business.

"The regulatory and other investigations that have been recently announced are likely to subject the bank to greater scrutiny from regulators, will take management time and result in the bank incurring costs not currently included in its business plan which cannot be quantified at this time," it said. "Recent events may have caused some brand and reputational damage, but it is too early to form a definitive view as to the extent of such damage."

The "events," combined with new rules forcing banks to let consumers switch their current accounts within seven days at a time when Co-operative Bank has had to rein in marketing, may have cost it customers, it added.

However, it said its retail deposit base and liquidity position are stable.

Co-operative Group expects a court meeting to take place on the restructuring changes on Dec. 2. Under the existing timetable, which the mutual said may change, creditors' meetings to vote on the restructuring are due to take place on Dec. 11.

-- By Laura Board in London.