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Q&A: should you sell your Nationwide Pibs?
Nationwide Pibs investors have been offered a compelling deal to sell their investment back.
by Michelle McGagh on Sep 17, 2013 at 07:51
Investors in Nationwide's permanent interest-bearing shares (Pibs), a type of bond issued by building societies, have a decision to make about the future of their investments.
The building society has made a ‘tender offer’ to buy back the Pibs as it tries to improve its financial position.
Nationwide isn’t in trouble but it needs to increase the capital on its balance sheet. Under new ‘leverage’ rules the Prudential Regulation Authority (PRA) requires banks and building societies to hold 3% of the amount they have lent out in loans in capital but Nationwide holds just 2%. Buying back up to £715 million of Pibs will help as it will no longer have to pay interest on these bonds.
What am I being offered?
The offer depends on which of the five Nationwide Pibs you hold.
If you invest in either the 6.875% Pibs with a call date of 2019 or the 7.25% Pibs with a call date of 2021, Nationwide will buy back your bonds at face value – or ‘par’. This means that they will be bought back at their original issue price so if you paid par – typically £1 – for your Pibs you will receive the same amount back.
If you hold the 7.859% Pibs Nationwide will buy it back at ‘above par’ meaning for more than its face value. It will pay 106.5p in the £1 meaning you will receive more than you originally paid if you bought the Pibs at face value.
However, the remaining two bonds will be bought back ‘below par’ – meaning the building society will pay less than face value for them. You may have seen references to a ‘haircut’ which means that you will have to take a loss on your investment.
The 5.769% Pibs is being bought back at 95%, meaning you will receive 95p in the £1. If you hold the 6.25% Pibs you will be offered even less at 91%, or 91p in the £1. If you have seen headlines about bondholders receiving a ‘10% haircut’, this is the Pibs that they are talking about.
Should I take the deal?
The tender offer has generally been given the nod of approval by investors and investment experts. The Pibs market is quite illiquid at the moment, meaning it is hard to sell them to other investors, so the chance to get rid of them at face value can be attractive.
However, the choice to sell them is up to you, Nationwide isn’t forcing you to sell although it hopes many investors will.
Mark Holman of TwentyFour Asset Management, a bond fund manager, said that Nationwide had been ‘as even handed as possible’ in its prices to ensure retail investors receive as good a deal as institutional investors even though ‘in the short term this may be more expensive to them’.
What happens if I don’t take the deal?
Many Pibs investors are retired and rely on the coupon for income as part of their pension. They face having to reinvest the money at a time when decent interest savings rates are rare.
However, there is a worry that if you don’t sell the Pibs back to Nationwide now, you will find it difficult to offload them in future if you should change your mind or need access to cash.
If Nationwide snaps up lots of the bonds and essentially takes them out of the market, then the market becomes even more illiquid and the Pibs will be harder to sell. This may result in investors having to sell them at a reduced price later.
The five Pibs up for tender do all have maturity dates but keep in mind that Nationwide is under no obligation to return your money at this point and can carry on paying interest, meaning you may not receive your original investment back at the time stated.
Despite the drawbacks to a less liquid market, Holman said he would still recommend the Nationwide Pibs.
‘The outstanding Pibs that have not been tendered at this stage look like the best instruments to play this credit story,’ he said.
The decision investors have to make is whether they take the lump sum now or continue to receive interest from the Pibs.
When do I have to make a decision?
The deadline for retail investors with up to £100,000 invested in Nationwide Pibs is 24 September. The deadline for larger investors – such as institutions – has been and gone and 67% of their holdings were sold back to the building society.
Aren’t Nationwide issuing new bonds?
Even though the regulator is happy with the capital raising plans that Nationwide is carrying out it has confirmed that it will be issuing a new type of bond-share hybrid called a ‘core capital deferred share’ (CCDS).
A CCDS differs from Pibs in that they count towards a lenders’ core one capital where Pibs do not.
Nationwide plans to issue a CCDS by the end of next year and will become the first mutual to do so. There aren’t any plans on how much Nationwide wants to raise with the CCDS issue but chief executive Graham Beale (pictured) has said before that he would like to raise between £300 million and £500 million.
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