West Brom pibs

[NealMorris]

West Brom PIBS are still outstanding, it seems a little surprising they did not buy the outstanding issue in with a sensible offer or simply sought permission to extinguished them over time with market purchase authorisation. West Brom seem to be headed in the right direction however they have just announced skipping the agreed coupon options which seems to suggest the society is still not in very good shape after all. Has anyone a view on these?

[GoSeigen]

West Brom PIBS are still outstanding, it seems a little surprising they did not buy the outstanding issue in with a sensible offer or simply sought permission to extinguished them over time with market purchase authorisation. West Brom seem to be headed in the right direction however they have just announced skipping the agreed coupon options which seems to suggest the society is still not in very good shape after all. Has anyone a view on these?

I think you may be a bit confused. If you are referring to this statement then nothing is being skipped, in fact the opposite because they are announcing payment of a coupon of 0.74% on 5 Oct 2022, which is 50% more than the 0.5% paid in April 2022. I expect the next coupon will be well above 1%.

There was discussion about WBS earlier this year here. I think the society is in very robust shape.

GS

[Gan020]

The PIBS pay the lower of the equivalent rate of the PPDS holders had they been in issue and the 5 year gilt +2.8%

I am not sure what the equivalent PPDS rate is but I can take a stab at 5 year gilt +2.8%. The 5 year gilt rate at the reset date of 05.04.21 was around 0.41%. So, that would give an interest rate for these PIBS of 3.21% per annum until the next reset on 05.04.26

Additionally I would argue that the gilt rate ought to be subject to the SONIA adjustment of 0.2766% but I suspect the West Brom directors will try and avoid that. So, the on-going rate for the next few years is either 3.21% or 3.49%, unless the PPDS equivalent rate takes precedence, which I haven't been able to work out.

However, the 3.21% or 3.49% only gets paid if the notional PPDS reserve is high enough. This has been in deficit until recently which was why there were no coupon payments until March this year.

Regrettably WBS don't seem to publish this in their accounts so I've tried to work it out.
Somewhere they made a statement that as at 30/09/21 the PPDS reserve was £0.7m. To 3/22 they made an additional £11.3m profit which I think gives +£3.1m to the notional PPDS reserve. (11.3+1.2)*.25, meaning the notional PPDS reserve was £2.4m which I would have though was enough to make a full distribution not a part one.

However, PIBS distributions are entirely discretionary, perhaps that's the reason it's not the full 3.21%. I suspect not though and it's something to do with the numbers.

Regardless, a maximum possible return of about 3.55% per annum until 04.26 based on a purchase price of 90p does not seem that attractive to me and at the level of interest they are paying why would they redeem them? And if they wanted too, which they have given no indication to date surely best to do it just before the reset date in 2026. That might given you another 10% capital gain if it happens then. I do appreciate there may be other motivations to redeem this small issue, so that is worth considering.
Frankly though I'm not sure they would even then. 5 year gilts + 2.8% is cheap.

3.6% available from Cahoot(Santander) on a 3 year FSCS guaranteed bond as a comparison.

I sold mine about 6 months ago when the first 0.5% coupon was announced.

[NealMorris]

The PIBS pay the lower of the equivalent rate of the PPDS holders had they been in issue and the 5 year gilt +2.8%

I am not sure what the equivalent PPDS rate is but I can take a stab at 5 year gilt +2.8%. The 5 year gilt rate at the reset date of 05.04.21 was around 0.41%. So, that would give an interest rate for these PIBS of 3.21% per annum until the next reset on 05.04.26

Additionally I would argue that the gilt rate ought to be subject to the SONIA adjustment of 0.2766% but I suspect the West Brom directors will try and avoid that. So, the on-going rate for the next few years is either 3.21% or 3.49%, unless the PPDS equivalent rate takes precedence, which I haven't been able to work out.

However, the 3.21% or 3.49% only gets paid if the notional PPDS reserve is high enough. This has been in deficit until recently which was why there were no coupon payments until March this year.

Regrettably WBS don't seem to publish this in their accounts so I've tried to work it out.
Somewhere they made a statement that as at 30/09/21 the PPDS reserve was £0.7m. To 3/22 they made an additional £11.3m profit which I think gives +£3.1m to the notional PPDS reserve. (11.3+1.2)*.25, meaning the notional PPDS reserve was £2.4m which I would have though was enough to make a full distribution not a part one.

However, PIBS distributions are entirely discretionary, perhaps that's the reason it's not the full 3.21%. I suspect not though and it's something to do with the numbers.

Regardless, a maximum possible return of about 3.55% per annum until 04.26 based on a purchase price of 90p does not seem that attractive to me and at the level of interest they are paying why would they redeem them? And if they wanted too, which they have given no indication to date surely best to do it just before the reset date in 2026. That might given you another 10% capital gain if it happens then. I do appreciate there may be other motivations to redeem this small issue, so that is worth considering.
Frankly though I'm not sure they would even then. 5 year gilts + 2.8% is cheap.

3.6% available from Cahoot(Santander) on a 3 year FSCS guaranteed bond as a comparison.

I sold mine about 6 months ago when the first 0.5% coupon was announced.

Nicely put, I see they are being sold down post this announcement, I just get the feeling the reserves are no longer what they first may have appeared, its a mystery. It would seem there is little reason to want to hold these until 2026.

[tincture]

Big drop in WBS this morning
Any news? I can't see an RNS

tincture

[Gan020]

Big drop in WBS this morning
Any news? I can't see an RNS

tincture

The share price has been completely mispriced for months imho.


This instrument is currently paying 1.48% per annum.

If West Brom makes sufficient profits the maximum payable until 2026 is approximately 3.21% per annum if my maths is right.


A broad comparsion might be the Aviva prefs which are paying around 7.5%. But Aviva is well a funded company with no history of not paying it's coupons. West Brom is not well capitalised and has only just recovered enough that it's starting paying coupons in the last year for the first time in 10 years.

If you take the view that that will be a short shallow recession and house and commercial prices aren't going to fall much and won't cause impairments or losses for WBS, then what coupon would be appropriate for WBS? Well, imho something north of 10%. I'd personally want more than that but lets call it 10%. That would imply a share price of 30p if the coupon immediately rises to 3.21% (which I doubt)

If you take the view that it's going to be long recession causing house and commercial prices to be significantly under pressure with mortgage holders defaulting, within 2 years you could see large losses at WBS again and the coupon going back to zero, in which case the share price might be around say 15p as some people are always willing to take a punt.

Nearly 5% available on a 5 years FSCS guaranteed building society bonds atm...

[Jwdool]

A lot has been written about the WBS PIBS, but there is a remarkable profit opportunity on these notes.

The current situation is that they are paying out around 3.1% off par (on the proviso the profits of the society remain above ~£20 million). On the half-year they had made >£18m, so there isn't any question about the payment to PIBS holders. The market is trading around 63p, so the yield right now comes in at around 4.9%, which is pretty pedestrian.

The notes, however, reset to the 5 year gilt, plus 280 bps in February 2026. As at today's date, the 5 yr is trading at ~3.73, so the return would be around 6.53% off par, or 10.36% at current market prices. Obvs far more attractive, but again contingent on the profits of the WBS remaining above ~£40m. This looks fairly likely given improvements in NIM and the return to a successful trading strategy that had been lacking before and after the GFC.

All of that said, the PIBS don't count towards Tier 1 capital. This means there will be pressure on the WBS board to call these notes at the 2026 date. If they don't call the notes, they will be paying away members funds at a rate of 6.53% (assuming the gilt rates remain at these levels) for non-reg cap. That is an expensive and unnecessary. The outstanding issue remains around 7 million shares, so this is little more than a rounding error on the accounts.

The return for holders today, should the notes be called at par in 2026? That would be 4.9% for 3 years + ~37 points or around 17,2% return to 2026. The risk to capital, given the issuance of CET1/ Tier 1 capital notes is negligible, although the tail risk would be a fall in the society profits. On balance, these notes represent a very attractive risk weighted return based on a limited downside, with a significant upside providing the WBS board act sensibly and call in 2026.

[GoSeigen]

A lot has been written about the WBS PIBS, but there is a remarkable profit opportunity on these notes.

The current situation is that they are paying out around 3.1% off par (on the proviso the profits of the society remain above ~£20 million). On the half-year they had made >£18m, so there isn't any question about the payment to PIBS holders. The market is trading around 63p, so the yield right now comes in at around 4.9%, which is pretty pedestrian.

The notes, however, reset to the 5 year gilt, plus 280 bps in February 2026. As at today's date, the 5 yr is trading at ~3.73, so the return would be around 6.53% off par, or 10.36% at current market prices. Obvs far more attractive, but again contingent on the profits of the WBS remaining above ~£40m. This looks fairly likely given improvements in NIM and the return to a successful trading strategy that had been lacking before and after the GFC.

All of that said, the PIBS don't count towards Tier 1 capital. This means there will be pressure on the WBS board to call these notes at the 2026 date. If they don't call the notes, they will be paying away members funds at a rate of 6.53% (assuming the gilt rates remain at these levels) for non-reg cap. That is an expensive and unnecessary. The outstanding issue remains around 7 million shares, so this is little more than a rounding error on the accounts.

The return for holders today, should the notes be called at par in 2026? That would be 4.9% for 3 years + ~37 points or around 17,2% return to 2026. The risk to capital, given the issuance of CET1/ Tier 1 capital notes is negligible, although the tail risk would be a fall in the society profits. On balance, these notes represent a very attractive risk weighted return based on a limited downside, with a significant upside providing the WBS board act sensibly and call in 2026.

They didn't call in 2021. Would you put that down to the fact that they didn't need to pay interest at the time? Or was is the timing of the grandfathering more significant?


GS

[Jwdool]

I suspect they didn't call in 2021 because there was a nominal deficit on the PPDS which needed to be "filled in" before they were required to pay coupon. This meant they had free capital, followed by cheap capital from 2021 until 2026. On this basis, they felt they should continue with that arrangement. The deficit no longer exists, given the growing profits of the society. The board isn't investor friendly, they have a sharp team in Treasury - who are not at all concerned about reputation risk with the smaller, retail investor. That has been the case since 2008 - when their treatment of their PIBS holders was consistently poor. The experience of the PIBS holder being trounced at WBS is evidenced in a number of press articles since the GFC.

I anticipate their disregard for the retail investor will continue, so one has to view the boards decision on the PIBS in purely commercial terms. They will struggle to justify the cost of non-reg cap post Feb 2026, so on balance, there is a reasonable assumption they will be tempted to call. If they don't call and the profits hold up, then these notes will produce >10% return for Tier 2. That's not shabby.

[hiriskpaul]

What is the spread like on these and can you actually buy a meaningful amount? HL only offer phone dealing and I know they have been incredibly illiquid in the past.

[Jwdool]

The last I heard, there was an offer for around 100k at ~63. Liquidity isn't good, so this is very much a buy and hold. You may need to wait for offers if you want to buy. I'd certainly be happy to buy more of these at or around these levels. Patience is key with this issue, but the WBS will at some point want to take this embarrassing issue off their balance sheet.

[88V8]

What is the spread like on these and can you actually buy a meaningful amount? HL only offer phone dealing and I know they have been incredibly illiquid in the past.

Bt 35k at 62.50 telephone ii today.
Could have had 50k at 62.75.
Did not ask for more.

V8

[NealMorris]

The current situation is that they are paying out around 3.1% off par (on the proviso the profits of the society remain above ~£20 million). On the half-year they had made >£18m, so there isn't any question about the payment to PIBS holders

That's not quite correct, payment is discretionary, so why would they want to pay the full coupon at all? As has already been pointed out, they have no regard to private investors and care little for investor reputation. Rather than use the money to pay the pibs, they should easily find a 1001 other things to use the money. It seems that a notional sum + the 5 year bench mark mean nothing.

[Jwdool]

The legal position, as I understand it is as follows. Once the PPDS deficit was filled in, the discretion to pay the PIBS is aligned to the same discretion on all the Tier 1/ CCDS issue. In practical terms, for WBS to not pay on the PIBS would legally require them to suspend payments on the CCDS. Given this is now the principle funding mechanism for WBS, there is little chance they will do that. There are also good legal arguments that can now be deployed which suggest the discretion to suspend payments can only be applied if there is a serious risk to a capital shortfall per CRD iv/ v. The WBS is miles away from that. On this basis, it is now highly likely the coupons will continue to be paid along the lines set out above.

[Gan020]

Welcome to the Lemon Fool

A lot has been written about the WBS PIBS, but there is a remarkable profit opportunity on these notes.

The current situation is that they are paying out around 3.1% off par (on the proviso the profits of the society remain above ~£20 million). On the half-year they had made >£18m, so there isn't any question about the payment to PIBS holders. The market is trading around 63p, so the yield right now comes in at around 4.9%, which is pretty pedestrian.

The notes, however, reset to the 5 year gilt, plus 280 bps in February 2026. As at today's date, the 5 yr is trading at ~3.73, so the return would be around 6.53% off par, or 10.36% at current market prices. Obvs far more attractive, but again contingent on the profits of the WBS remaining above ~£40m. This looks fairly likely given improvements in NIM and the return to a successful trading strategy that had been lacking before and after the GFC.

All of that said, the PIBS don't count towards Tier 1 capital. This means there will be pressure on the WBS board to call these notes at the 2026 date. If they don't call the notes, they will be paying away members funds at a rate of 6.53% (assuming the gilt rates remain at these levels) for non-reg cap. That is an expensive and unnecessary. The outstanding issue remains around 7 million shares, so this is little more than a rounding error on the accounts.

The return for holders today, should the notes be called at par in 2026? That would be 4.9% for 3 years + ~37 points or around 17,2% return to 2026. The risk to capital, given the issuance of CET1/ Tier 1 capital notes is negligible, although the tail risk would be a fall in the society profits. On balance, these notes represent a very attractive risk weighted return based on a limited downside, with a significant upside providing the WBS board act sensibly and call in 2026.

My view differs.

Using the current 5 year gilt as the basis for predicting the 5 year reset point is flawed. The market considers interest rates will have fallen by then. It's hard to get an exact number but from what I can gather the market seems to be looking at somewhere around 2% in 2026. On that basis these PIBS would reset at 4.8%. That gives a return for the next 3 years of 4.9% and then 7.5% thereafter. The 7.5% is broadly in alignment with what is availalble now with other better high quality PIBS such at NOTP. Capital appreciation will be assured on NOTP between now and 2026 should the base rate drop to 2%.

I want to emphasise the "other better high quality" PIBS. These are names with no previous failures to pay on their PIBS, robust balance sheets and liquidity in the PIBS. West Brom have only just started paying again and whilst the current results are good, the buffer before they would stop paying again should they start incurring losses is tiny. I would suggest a look at West Brom's loan book is also worth some time as it looks far more exposed to a downturn that the peer group.

Will the PIBS be called in 2026? The PIBS will no longer be Tier 1 capital but it's important to note they will have been fully converted to Tier 2 notes by then so retain some use to the society. With a base rate of 2%, the society will be paying 4.8% on them. That's very cheap T2 debt for the society and therefore I am not persuaded they will call it.

My view is that if they were going to call it, they would be buying it in the market right now. Why pay 100p in 3 years time, when you can pay 63p today? I think the best you might get given how ruthless West Brom's treasury team is a tender off at 70-75p.


Fool's will have to make their own mind up. There's plenty of stock available to buy in the market right now. I think there's a reason for that, a large seller who wants out.

[Jwdool]

The basis for calculating a forward expected rate is by looking at the difference between e.g. the 2 year and the 5 year, i.e. the curve. The rates can be found here:

bloomberg.com/markets/rates-bonds/government-bonds/uk

The 2 year is 3.64% the 5 year is 3.64% and the 10 year is 3.85%. The implication on this is that the market expect forward rate in 2026 will be around 3.64, taking into account the shape of the curve which incorporates future interest rate and inflation expectations.

Any analysis of what may or may not happen in 2026, therefore, needs to be based on market pricing (obvs adjusting). It might turn out that rates go up rather than down, hence this could be seen as a quasi-linker. On a valuation analysis, it can only make sense to use the actual curve rather than the curve you think might exist in 3 years time.

I agree that the profits of WBS might get affected going forward - which could have a bearing on the distribution, however, they have put in substantial provisions against anticipated losses which look far too high given the the levels of employment in the UK and the low levels of LTV across the residential portfolio. In any event, WBS only need to clear ~£22m annually to pay out on current returns to 2026 (half year profits were ~£18m). They are likely to see profits growth now the NIM has increased and clear the required ~£40m to pay out at the higher level assuming the market's rate above turns out to be correct.

On this basis, the correct way to view these PIBS is: ~5% return to 2026, ~11% return thereafter, ~17% YTM if called in 2026. The risks are, the profits don't match the required hurdle in 2026 (in which case it is proportionally reduced rather than a binary loss), or the yield curve moves lower and the expected 11% needs to be adjusted lower.

[Gan020]

Any analysis of what may or may not happen in 2026, therefore, needs to be based on market pricing (obvs adjusting). It might turn out that rates go up rather than down, hence this could be seen as a quasi-linker. On a valuation analysis, it can only make sense to use the actual curve rather than the curve you think might exist in 3 years time.

I don't agree. It makes perfect sense to me to take a view of where the market will be in 3 years. To not do so would mean we have no opinion and everyone would produce the same arithmetic answer.
Further, the market is not very good at predicting the future. When these PIBS reset in 2021, 5 year gilts were about 0.3%. Anyone investing for 5 years in government gilts at 0.3% has not done well.

I think it best Fools consider running thier own numbers based on their own views and then consider whether the return is worth the risk by comparison with similar investments

[hiriskpaul]

The 2 year is 3.64% the 5 year is 3.64% and the 10 year is 3.85%. The implication on this is that the market expect forward rate in 2026 will be around 3.64, taking into account the shape of the curve which incorporates future interest rate and inflation expectations.

Not sure how you have done that, but I estimate it to be about 3.85%. 3 year rate 3.64%, 8 year by linear interpolation 3.77%, so F(3,5) = ((1+3.77%)^8/(1+3.64%)^3)^(1/5) - 1 = 3.85%.*

Anyway, I agree with Gan020 that a spread of 2.8% over 5 year gilts is not at all an unreasonable price to pay for T2 debt and would have thought that WBS would want to keep them. A bonus if called, but I would be inclined to invest on the basis that this is unlikely.


* Edit: I also agree with Gan020 that the 5 year rate in 3 years time is unlikely to be 3.85%, that's just the markets implied rate as of now. It will be different tomorrow!

[GoSeigen]

Fascinating discussion. WBS have been difficult to value for a long time. My view is that the valuation is getting easier as profitability improves and the reserve buffer for the PIBS builds up. As jwdool noted it means that these are likely to pay for a long time henceforth. I don't take as pessimistic a view as Gan020 on the possibiity of problems with the assets. As can plainly be seen with Manchester BS huge amounts of capital are being returned to banks, WBS will be no different. Meanwhile net interest margin is long off its bottom and I think will remain far more robust than the last decade which was awful for bank profitability.

So assuming coupons will always be paid, to me these are 5-year quasi inflation trackers with coupons roughly 2.8% over gilts which as hiriskpaul says is a comfortable rate for the issuer. For a potential investor it's far better than that because you buy that income at only two thirds of par today. Then it gets tricky because gilts move after reset; at the current time they have moved to the detriment of shareholders but it's possible that the next reset could be favourable to shareholders. We'll have to see.

Regards the call, I don't know enough about capital regulation and the frictional cost of maintaining such a small issue of shares. Like hiriskpaul I think it's prudent to invest on the basis that there will be no call. For me below 70p that still makes them a buy, if only for their unique properties and plenty of upside potential and IMO not that much downside. Gan020 postulates a tender. I don't see how a tender could be coercive so if too low investors would merely reject it. Tenders are costly to implement so the advantage of a call is that administratively it costs nothing (relatively speaking). Besides, there has been a tender offer already for WBS. IIRC it was not much lower than current price and that was when interest was in default and no prospect of resumption for years. I think a tender now would have to be close enough to par that it's not worth the bother.

So these remain a buy for me below 70, possibly a sell in the 80s and above, depending how gilts look. Haven't been able to get an online offer recently though...


GS

[Jwdool]

Perhaps another way to look at this WBS issue is to compare it with other similar quasi-linkers.

Nationwide 6.25s (5 year gilt + 258 bps) - trading at 104 (call in 2024).
Yield: 6.01%, YTC 3.71%

Nationwide 7.859 (5 year + 445 bps) - trading at 152 (call in 2030).
Yield: 5.82%, YTC 2.41%

One Savings Bank (5 year + 400 bps) - trading at 96.
Yield: 4/79%, YTC 7.48%

Obvs there are different credits here and we need to take account of the profitability - but setting aside those conditions, it seems to me the WBS is far favourable from a pricing perspective - in particular given the potential upside to call which seems to be more a function of internal accounting controls. There are only 7 million outstanding shares with an embarrassing history for WBS. The cost to par, relative to the outstanding number of shares is pretty de minimis.

I accept these notes might not be called but ~11% for Tier 2 at current market prices make these a great buy regardless of the call. The call would be a bonus. I guess much depends on your perspective of the future profit performance, but I'm pretty optimistic on financials at this time. We've not had rates this high for more than 15 years. Financials are going to make money.