The price of Bradford & Bingley's perpetual subordinated bonds (PSBs) has been discounting such an event for months, but it's still a shock when it happens. The government-owned lender has said it will not make the July payment on £50m worth of 11.25 per cent PSBs.
Interest on this instrument is cumulative, so it's possible that investors will get at least some of their money eventually. The lending business of the former mutual - the savings part was sold to Spain's Santander - is in wind-down mode. Its £40bn mortgage book will be progressively run-off, and once that process is complete, it is the company's intention to start repaying creditors.
But that could take years, and until then, it would seem likely that future interest payments will also be missed. The PSBs pay out twice-yearly, in January and July. The January 2009 payment was made.
The latest developments highlight the risks of investing in Pibs (permanent interest bearing shares) and PSBs. With no fixed redemption date, the investor is reliant on the market price at the time of sale, and Pibs/PSBs are not covered by the Financial Services Compensation Scheme. Holders of Pibs/PSBs rank further down the pecking order in the event of a company being wound up and its assets redistributed.
"There is a slight suspicion from some people that the government is treating the various blown-up banks unequally. Where there is the hope of sale or disposal of an equity stake, say Northern Rock or even RBS, prefs and so on are being paid, perhaps to present an orderly appearance to the market," says Mark Glowrey, a director of Stockcube Research and author of the IC's "bond of the week" feature.
He adds that this might represent a rubicon-crossing moment. Until now, no British bank had defaulted on a Pib payment. Now that one has set that unwelcome precedent, other struggling societies might decide there's less reputational damage to be suffered by following suit.
