Another week, another credit-crunch-induced first: this time for Britain’s mutually owned building societies. Unable to raise capital from shareholders in the same manner as a publicly listed bank, West Bromwich building society has been granted permission by the UK Treasury to issue a special class of ‘profit participating deferred shares’ (PPDS).
Unlike traditional permanent interest bearing shares (Pibs), these rank as higher-quality, ‘tier 1’ equity capital for the purposes of passing regulatory solvency tests. In a stroke, capital requirements are met, while the building society retains its mutual status. PPDS could be a “lifeline for the sector”, says Ellen Kelleher in the FT.
West Bromwich’s troubles are familiar. “Swaggering like a particularly brash bank”, says The Guardian, it “wanted some of the action” in buy-to-let. So the 160-year-old society “ended up lending more in this area than in conventional mortgages”. It also “advanced a billion quid” to the commercial property sector, “and – just like Northern Rock – began drawing more of its funding from the money markets”. Net result: a £49m pre-tax loss last year, and the need to shore up its balance sheet. Enter the PPDS scheme.
So what does this mean for existing Pibs investors? The good news, says Kelleher, is that the issue of PPDS keeps West Bromwich afloat and its Pibs will also soon be awarded the same debt ranking as PDDS. That increases the chances of a payout should it, or indeed any other building society, fold.
On the flipside, any building society “can still refuse to pay interest on Pibs if they are in trouble”, says The Daily Telegraph’s Rosie Murray-West. Next month Bradford & Bingley will become the first former building society “to default on its Pibs… when it doesn’t pay out its six-monthly interest payment to 1,600 holders”. The 800 holders of West Bromwich Pibs face a cut in their next interest payment to 1.5% and no vote on the latest capital structure change. Other Pibs holders beware.