The beleaguered Co-operative Bank will this week pick new City advisers to negotiate a restructuring deal with its investors as hopes of an outright sale of the company diminish.
Sky News has learnt that the Co-op Bank is to hire investment bankers to help thrash out an agreement with a group of US hedge funds, which hold big equity stakes in the lender as well as large chunks of its debt.
The move comes just days after hedge funds led by GoldenTree Asset Management and Silver Point lined up PJT Partners (Frankfurt: 1PJ.F - news) and Promontory Financial, a regulatory consultancy, to help protect their financial interests during the Co-op Bank's looming restructuring.
Sources said the Co-op Bank was likely to hire a firm such as Greenhill or Moelis, which employ large teams focused on financial restructurings.
The sale process has drawn interest from Virgin Money, but few observers expect the talks to result in a conventional takeover.
GoldenTree and Silver Point, which own substantial equity stakes in the lender, are likely to be asked to inject further capital through a new debt-raising exercise.
It is unclear at this stage whether they will be prepared to do so, although senior City insiders said today that they believed they were likely to.
Earlier this month, the Co-op Group wrote off the remaining value of its 20% shareholding in the Co-op Bank - incurring a £140m hit which plunged the supermarkets-to-insurance mutual to a statutory annual loss.
Following an initial bid deadline earlier this month, the Co-op Bank issued a statement saying that it had received "a number of non-binding proposals" relating to its future.
It added that it continued to hold talks with "existing and other potential new investors on options to build capital".
The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its £1.5bn bailout in 2013.
Further equity has been raised since then.
The Co-op Bank's huge pension liabilities are among the major obstacles to a sale.
Senior Co-op Bank bonds have been trading at little more than 80p in the pound in recent weeks, underlining investors' pessimism that a £400m debt repayment due in September will be made.
Junior bonds have been trading at much more depressed valuations.
The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 by a group of American hedge funds to well over £2.5bn.
If new capital is not forthcoming, regulators would have little choice but to put the Co-op Bank into a resolution process, which would involve an orderly wind-down of the company's operations.
At that point, the likes of Nationwide could be asked to step forward to take on some or all of the Co-op Bank's four million customers.
A number of other parties, including OneSavings Bank (Stuttgart: 2OS.SG - news) and Santander UK (LSE: 44RS.L - news) , are more interested in acquiring individual loan portfolios from the Co-op Bank.
PricewaterhouseCoopers (PwC) was drafted in last year to help the Co-op Bank find buyers for a £350m portfolio of commercial real estate loans, although that process is said to have been put on hold.
The Co-op Bank's balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.
The Co-op Bank's former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs (BSE: MPSLTD.BO - news) .
The bank declined to comment.