Safe bet juicy high yielders

"Generally, prices are a lot better," says Mark Tabor, a professional bond investor who runs a website for private fixed-income investors. "Yields are so low on everything else. People who are switched on are looking at their pension pots and thinking what they can do about this [low interest environment]? You have an annuity offering 5-6 per cent at most, yet the best of these issues offer 8-9 per cent and you can keep your capital."

There is also an issue of scarcity. The capital rules for building societies under Basel III international banking rules will not ultimately allow these instruments to be counted as core capital.

"No more Pibs will be issued now," Mr Tabor says. "Nationwide Building Society is planning to issue core capital deferred shares (CCDSs), which have a variable return dependent on profits, but capped. I don't like the look of them at all," he said.

Whether this turns out to be the route by which other building societies will issue Tier One capital remains to be seen. However, the requirement for holders of a Tier One-compliant issue to be available to be hit to conserve capital in tough times, means that the current crop of Pibs, which have very rarely been soaked this way, will look attractive by comparison.

The new CCDS instruments will stand behind Pibs, just as ordinary shares stand behind subordinated bonds and preference shares. That gives an extra layer of capital insulation to Pib payments and capital.

The complexity of call dates

That said, there is an additional complexity for investors looking to buy into Pibs, and that is the issuer's options to call (ie, repay) an issue early. Until 2011, issuers had always repaid issues at the first call date, and then issued a fresh security. However, the fall in Libor and gilt yields in the past three years has made the reset rates written into some prospectuses incredibly tempting as a very cheap source of funding (and thus bad for the Pib holder). Principality Building Society did this in 2011 with its 5.375 per cent Pib, which had a reset rate of just 1.05 points over Libor, slashing the running yield from around 8 per cent to just 2.67 per cent, where it now trades as a floating rate note. Nationwide is widely expected to do the same with a Pib available to call in 2013.

Other issuers are bound to follow suit. Two tactics will help investors avoid this problem. One is to pick issues with call dates at least five years into the future, by which time interest rates and thus the five-year gilt yield or Libor benchmarks may have risen. The second is to pick a more generous reset rate. The Pib issues highlighted below offer a fair selection of those issues which have one or both of these advantages, and can be thought of as safe bets. A few are perpetuals, which cannot easily be redeemed. "Investors really like the true perpetuals," Mr Tabor notes.

Finally, a number of the issues trade over par, which would indicate a capital loss for holders if there was ever a redemption. That is a somewhat distant probability for true perpetuals, such as the Cooperative Bank 13 per cent issue. However, there are some other issues - which for this reason are not included in this table - where prices are over par because of the generous yield, but there is a distinct possibility of repayment on the call date, including a couple of issues from Nationwide. This brings the rather tricky dilemma of a modest capital loss at call, or a reset rate which is not as generous as the current running yield. And the choice is not the investor's to make, but the issuer. So, while Pibs are extremely and increasingly attractive for yield seekers, choosing the right issue is essential.

Safer bets in the world of Pibs