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Pick a Pibs: Halifax 9 3/8% perpetual bond

A new series taking a closer look at Pibs (permanent interest-bearing shares) and perpetual bonds. We start with one of the most popular stocks in our weekly Pibs and perpetuals table.


by Michelle McGagh on May 03, 2013 at 07:55

Pick a Pibs: Halifax 9 3/8% perpetual bond

The Halifax 9 3/8% perpetual subordinated bond is one of the most popular stocks in our weekly Pibs and perpetual bonds table. At its latest price of 122.5p it provides a gross (pre-tax) yield, or interest rate, of 7.65% at a modest minimum investment of just over £1,200.

This bond – one of four from Halifax in the table – is what is known as a ‘conversion’ as it was converted from a permanent income-bearing share (Pibs) to a perpetual bond when the Halifax building society demutualised and listed on the Stock Exchange in 1997.

There are two main differences between Pibs and perpetuals. As with most bonds, Pibs have a maturity date when the company behind the Pib will repay investors the principal or ‘par’ value at which the Pib was issued, normally 100p. They also have a ‘call’ date when the issuer has the right, but not the obligation, to buy back the Pib at its par value.

Perpetual bonds do not have maturity or call dates. They go on forever or until the issuer decides to redeem the bond. The significance of this is that investors can only get their money back by selling the bond on the market through a stockbroker. The price they get will depend on market conditions.

Rik Edwards, Pibs and perpetual bond specialist at Cannacord Genuity, a stockbroker, said the main concern for the bond is inflation and interest rate rises. All bonds are extremely sensitive to changes in the cost of living and borrowing. This is because rising inflation will erode the spending power of the bond’s fixed interest payments. Similarly, rising interest rates will make the bond’s fixed interest rate look less attractive and its price will fall.

It is important to note that bond prices will often anticipate the change in interest rates and their price may fall before interest rates actually rise. Given that we have had four years of historically low interest rates it is inevitable that they will rise at some point. However, most forecasters say it is highly unlikely interest rates will rise before the next general election in 2015.

Edwards said: ‘Inflation and interest rates would affect the bond but with a gross yield over 7% there is a large cushion before you will get hurt.’
The advantage of perpetual bonds is they are ‘cumulative’ which means that if the issuer misses an interest, or coupon, payment, it has to pay up at a later date. With Pibs a missed payment does not have to be repaid.

Edwards said: ‘[The bond] is cumulative so if it does not pay on a particular year [Halifax] has the liability to make up the arrears. If it was a pure Pibs…and they cannot pay the coupon that interest payment is lost forever.’

This is an important point in light of the banking crisis of 2008. After its demutualisation the Halifax merged with the Bank of Scotland to form HBOS, a mortgage bank that went on a reckless lending spree that left it on the verge of insolvency.

The government had to ask Lloyds TSB to rescue the bank but ended up bailing out Lloyds in 2009 as bad debts mounted and public confidence in its position faded. 

As a consequence of its partial nationalisation Lloyds was ordered not to pay interest to the Halifax bondholders for two years although investors in this bond later received the interest.

The price of bonds is linked to the creditworthiness of the issuer. Moody’s, one of three leading credit ratings agencies, has put Halifax plc’s long-term credit rating at Baa3. This is its lowest ‘investment grade’ rating, just above ‘speculative’, riskier ratings. However, the rating is not under review and Moody’s says the outlook is stable. This is against a backdrop of Lloyds Banking Group making a slow recovery from the crisis. In the first quarter of this year it made pre-tax profits of over £2 billion, up from £280 million a year before.

For more information read: 'Q&A: what are Pibs and perpetual bonds?'

7 comments so far. Why not have your say?

Stephen Taw

May 03, 2013 at 13:02

Many, if not most, Perpetual Bonds have Call Dates. By and large the coupon in the event of "non call" becomes punitative or at least Issuers and Investors thought they would be at the time of Issue. Evaluation of the likelihood of a Call is the name of the game.

No Perpetual Bonds give the Issuer the right to redeem, Call Options aside, other than in certain circumstances detailed in the relevant Prospectus.. Given that you may pay significant premiums over par to buy Perps now you had better have a good idea of when they might be taken away from you at Par

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May 03, 2013 at 13:36

The feature describing the difference between perpetual bonds and PIBS is informative, but it does not explain how the bond's issuers decide on the coupon rate when the bonds are first issued. In 1997, when Halifax de-mutualised, the Bank of England Base Rate varied between 5.6875% and 6.25%. it would have been normal to issue a bond at a premium over base rate, but a premium of more than 3 basis points? If the bond issue had been say, £100m, the demutualised Halifax would have saddled itself with a permanent annual liability of £9.38 million, which would not change when market conditions changed adversely from 2008 and after. These changes are of course recognised in the market price of the bond, which as stated in the article, stands at 122.5p, reflecting the currently-assessed credit worthiness of Halifax(now HBOS). But the market price affects only buyers and sellers, it has no effect on the annual outlay to be incurred by the bond's issuer. With a current Base Rate of 0.5%, and speculation that this might reduce further, can readers be informed (a) how HBOS is able to continue to pay the enormous annual interest bill on this bond, and (b) what is the expectation that there will have to be a Govt. bail-out of the bond holders?

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Richard J Davis

May 03, 2013 at 14:32

"Edwards said: ‘Inflation and interest rates would affect the bond but with a gross yield over 7% there is a large cushion before you will get hurt.’"

This comment is complete rubbish and very misleading to unsuspecting investors who read this and may invest on the back of it. Just because a yield is high only means that the credit is poor and not that it will protect you from capital falls longer than lower income bonds. All bonds trade at a 'spread' over a high quality benchmark such as a gilt. The spread varies according to the quality, or likelihood or repaying the loan on maturity, of the borrower. This being the case the Halifax perp will probably fall in line with the benchmark, in fact I believe the spread will widen as interest rates go up as there will no longer be a need to 'chase high yields' when good quality debt gives better returns. So the concertina effect will reverse.

'Caveat emptor' or buyer beware as we are always saying!!

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Ian Phillips

May 03, 2013 at 14:57

@ Jimlad

Your calculations assume that this bond was issued when Halifax demutualised whereas it was already in existence as a Halifax Building Society PIB so it's coupon rate was set at an earlier date. As far as I recall, all of the Building Societies that became banks had PIBs issued and they became PSBs (Perpetual Subordinated Bonds) of the new banks.

The original PIBs never had call dates (hence "Permanent") , call dates are a relatively recent introduction so there PIBs on the market with and without call dates.

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Ian Phillips

May 03, 2013 at 15:10

Just as an aside, now that Citywire is taking a specific interest in PIBS maybe they could do a bit of investigative journalism! into the Bradford & Bingley PIBS that the Government have tucked in a drawer somewhere after inheriting them from that bunch of incompetents that preceded them.......

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Clive B

May 03, 2013 at 17:32

@ Jimlad

"it would have been normal to issue a bond at a premium over base rate, but a premium of more than 3 basis points?"

Assume you mean "..more than 3%", as a basis point is 0.01%

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May 04, 2013 at 19:07

How I agree with Richard J Davis. That was exactly the quote which leapt out at me. It is inherently unattractive to buy £1 for £1.22 - and without even the prospect that your £1 will be redeemed at some point. With interest rates at or near their low point, it's a one-way bet which way this will go from here and does a 7% yield compensate for seeing 20% or more of your capital disappear in a puff of smoke? As a retired bloke, I use Corporate Bonds as part of my portfolio to underpin a certain level of income but I have rarely, if ever, paid much above par and I have a spread of near- to medium-term maturity dates meaning I am not locked in too long if inflation takes off. On the same basis that when your shoe-shine boy starts to discuss share tips with you, it's time to get out of the market, I am really worried that so many retail punters are being drawn into this market apparently thinking it is an alternative to having cash on deposit in the bank.

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