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Is The Principality Building Society In Trouble

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Pibs Alert: Principality bond will not redeem next month

Principality building society has sent a shock wave through the Pibs (permanent interest bearing shares) sector by deciding not to redeem its 5.375% bonds next month. Investors face years of low interest rates and it is feared more societies could follow.


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Just about to transfer a large wedge into these.

Is there anywhere that's not in the shite.

LOL - me too. Well, I have the leaflets in the glovebox!

For exposure to UK bad debts HSBC seems least worst, but they're probably up the creek in Asia. Santander has middle range exposure, but big exposure to Brazil. RBS, Lloyds are pure "hotairmail" zombies. Barclays slightly worse than HSBC on UK side, but they've never come clean about their overall leverage. Nationwide slightly worse than Barclays.

It's true, coz the BoE says so - chart 2.22.


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Appears to be simply to do with the cost of funding. If they don't call the bond ( ahead of its final redemption date ) the interest rate payable drops to a LIBOR related one. It's purely a commercial decision on the interest rate payable but I understand it's the first time a call hasn't taken place and may affect Principality's ability to raise funds in the future.

For the PIBs investor, it's a case of reduced income ( In some case, substantially lower, others less so ) in the future and as a result lower prices in the market.


From Fixed Income Investor Blog

Can you rely on sub debt calls? Maybe not. The team at Collins Stewart have highlighted that the Principality BS will not be calling the 5.375% notes. Rik Edwards writes:

Good Morning, Principality Building Society today announced that it will not exercise its call option on the 5.375% notes 2016 (PBS) on 8 July:


Interest will now be paid at the rate of 100.5 basis points over 3-month LIBOR: currently this comes to a floating rate of about 1.83% on these "Step-up" notes. These notes are due to be redeemed at 100 on 8 July 2016.

This was the first call due amongst the PIBS and subordinated bonds we cover, and the fact that a non-distressed issuer has decided not to call its bond is significant. In this case the damage is mitigated by the 2016 maturity date, but no other callable bonds on our list have a maturity date. If other building societies or banks decide not to call their PIBS or bonds, the impact on value could be serious, especially in cases where the coupon is reset against currently low LIBOR rates.

We will shortly send out an analysis of which PIBS and bonds are more vulnerable to calls not being exercised in future. R.E

My view; commercially this makes sense, L+100 is not so much a step-up as a step-down. However, there is an expectation from many investors that banks will honour calls on sub debt. This move from Principality may be the thin end of the wedge.

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Seems perfectly sensible to me.

They can call the notes now and have to refund themselves at whatever the market would charge, or leave them for another 5 years paying Libor + 100bp to the note owner. Why wouldn't you do the same (with 3m Libor currently at diddly squat)? Luckily for the note owners, the notes have a final redemption in 2016 when they must be repaid. Much worst for the other owners or PIBs that revert to some sort of perpetual FRN at a pretty low spread.

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