Until the credit crunch slashed and burnt its way through the UK market, permanent interest bearing shares (Pibs) were one of the most popular asset classes for retail investors to access decent income. What was supposed to be a safe (ish) asset class turned out to be as vulnerable to the consequences of the extravagant lending policies of former building societies (Northern Rock, Bradford & Bingley) as their unfortunate shareholders. Against that already unpromising background, it is becoming increasingly clear that building societies are prepared to exercise the call options on Pibs, rather than leave in place what has become an expensive source of funding.
The lastest institution to start bearing down on Pibs is the Yorkshire Building Society. The society has launched a tender offer for four tranches of its subordinate debt, including the popular 5.649 per cent issue. Yorkshire is offering 82p in the pound for the security, which has a call date of 27 March 2019. That represented a 10p premium to the last market price, although this has since been wiped out. Investors who refuse the offer could eventually see the coupon reset to three-month Libor (London interbank offered rate), plus 204 basis points which, at current prices, would cut the income yield in half to around 3 per cent.
That seems flintily ungenerous, but it highlights how Pibs have become a burden for building societies looking to strengthen their balance sheets. Simply put, it makes little sense to pay 5.6 per cent interest on £150m of debt when three-month Libor has fallen to a low of 0.64 per cent. In other words, Pibs have become an expensive burden for the institutions that issued them at a time when interest rates were much higher.
There are, of course, ways to profit from Pibs being called. For instance, anyone who bought the Yorkshire Building Society 5.649 at its low of 43p, is now sitting on a fat profit. CanaccordGenuity has identified other Pibs that could benefit as a result of Yorkshire's action.
| PIBS | Callable: | ISIN: | Price (p): |
|---|---|---|---|
| Co-operative bank 5.5555% | 14/12/2015 | GB00B3VMBW45 | 77 |
| Manchester 6.75% | 13/04/2030 | GB00B0712W15 | 88 |
| Nationwide 6.024% | 06/02/2013 | XS0284776274 | 85 |
| Nationwide 6% | 15/02/2016 | GB00B120GX99 | 86 |
| Nationwide 6.25% | 22/10/2024 | GB0033627968 | 89 |
| OneSavings Bank 6.591% | 07/03/2016 | GB00B61ZXL72 | na |
| OneSavings Bank 7.875% | 27/08/2014 | GB00B67JQX63 | na |
| Principality 7% | 01/06/2020 | GB00B010CN58 | na |
| Skipton 6.875% | 13/04/2017 | GB00B1VYCN43 | 75 |
