With St David's Day not far off, our bond tip this week has a Celtic tinge with the Principality 7% permanent interest-bearing shares (Pibs) issued by Principality Building Society a good start for savers looking for income. It is a measure of how much the building society sector has consolidated in the past year that the Cardiff-based Principality is now the seventh-largest society in the UK with assets of £6bn.
Principality issued £60m of the security in 2004 at a price of 99.23 pence and was rated BBB+ at the time by Fitch, with a minimum denomination of £1,000. The bond pays a semi-annual coupon in June and December at a rate of 7 per cent. But from 2020, the Pibs can be regularly called at par, or the coupon reset to 3 per cent over five-year gilts. Like all Pibs, the securities are subordinated obligations - which means holders will be third in line for payment behind the depositors and the regular bond holders in the worst-case scenario, and the higher risk is reflected in the current B3 rating from Moody's.
However, the society returned a £14m profit last year and, unlike many other mutuals, actually increased its deposit base in the credit crunch. The tier-one capital ratio stands at a healthy 12.5 per cent and an exceptional 104 per cent of loans is funded by customer deposits. One cloud on the horizon is the Nemo personal finance division, which advances second mortgage loans, but this appears to have returned to profitability. Some of the perceived risk has now lifted since Principality Pibs were last featured and investors can trade them with a little more confidence, even if the price is now much higher than the 49 pence level reached during the depths of the banking crisis.
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