I last looked at the Principality 7% permanent interest bearing shares (Pibs) around two years ago ( see Bread of heaven). It's a bog-standard subordinated issue in most respects, but like some others, it does have a call feature - and it's worth assessing whether it's likely to be exercised.
Granted, there is not an imminent danger. Only starting in 2020 does the society have the right to either call the bond at par or reset the coupon to 3 per cent over five-year gilts. It has the same option at five-yearly anniversaries after 2020.
Should the building society choose to call the bond in eight years' time, investors who have bought under par will realise a healthy profit. But, should the society choose to extend the maturity, they will be somewhat at the mercy of the prevailing gilt yields at that point. Right now, five-year gilt yields are just over 1 per cent. If they were at that level in 2020, resetting the coupon would be the obvious choice for the society.
The sensible thing for investors to do is to assume a worse-case scenario. But even if you do so, the Pibs don't look a bad investment. With the bond trading in the mid-60s, a £6,500 investment would buy £10,000 nominal, which will throw off around £5,950 of coupons and accrued interest alone over the next eight-and-half years. Any value left after that - and I expect there'd be some - would be a bonus.
That assumes that the society continues to pay coupons, of course - and recent history in this marketplace has not been entirely happy, with coupon cuts and capital restructurings causing lots of controversy. But the group's first-half statement for 2011 suggests it's weathering the downturn fairly well. Profits are gently rising, impairment is falling and core tier-one capital stands at a healthy 11.6 per cent. To read more, click here to download the report and accounts.
| Principality Building Society 7% Pibs (ISIN: GB00B010CN56) | |||
|---|---|---|---|
| Price | 65p | Running yield | 10.8% |
| Coupon | 7 per cent* | Issue size | £60m |
| Payable | Semi-annual | Rating | n/a |
| Maturity | Undated* | Minimum piece | £1,000 |
* See text for explanation of call feature
NEW! See our new-look corporate bond, gilt, and Pibs data tables here...
