West Bromwich Building Society today stepped back from the brink of collapse after announcing a debt-for-equity swap deal with its bondholders.
The building society, which employs 850 staff and has 350,000 savers, said this morning that it had reached a deal with debt holders that would involve the exchange of its subordinated debt, totalling £182.5 million, for a new instrument, profit participating deferred shares (PPDS).
News of the deal, which is due to complete by the end of July, came as West Bromwich brought forward its full-year results from Monday, showing a post-tax loss of £39.3 million, compared to a profit last year of £33.1 million, after £65.2 million of bad debt provisions.
It said that the capital exchange would “materially strengthen the society’s core tier 1 capital ratio from 6.8 per cent to 11.6 per cent”, adding: “At this level, the society’s core tier 1 capital ratio is amongst, we believe, the highest in the sector.”
A bank or building society’s tier 1 capital is a core measure of financial strength and represents the amount of capital held on the balance sheet as a proportion of a bank’s loan book.
Advertisement
Robert Sharpe, chief executive of West Bromwich, said: “The exchange of the society’s tier 2 sub-debt into core tier 1 capital materially strengthens our capital position and, under stress-test scenarios, has demonstrated our ability to withstand a further significant deterioration in market conditions.
“We have a solvency ratio of 14 per cent and, post exchange of the sub-debt, a core tier 1 ratio of 11.6 per cent, ratios which are amongst the strongest in the sector. With this firm footing, we are well positioned for the future.”
There had been speculation for months over the future of the West Midlands-based society which spans 46 branches.
The tripartite authorities — the Treasury, the Bank of England and the Financial Services Authority (FSA) — have been trying to find a buyer for the building society, the eighth biggest in the UK, with the Coventry and Yorkshire societies among those interested.
Today’s debt-for-equity swap — a move not previously attempted in the sector — has been complicated because West Bromwich is owned by its members and does not have shareholders, which means the debt cannot be converted into conventional equity.
Advertisement
But the Government and its advisers have come up with a new form of capital instruments called PPDS that will act in a similar way to equity, including absorbing losses. The instruments will pay a dividend of up to 25 per cent of the mutual’s post-tax profits.
The embattled society has a £1 billion commercial property loan book and £3 billion in buy-to-let mortgages. It has only £2.6 billion in prime residential mortgages.
As well as boosting West Brom’s core tier 1 capital, the deal will increase the size of the pool of capital that absorbs losses from West Brom’s loan book. The change to the capital base will not affect customers, and savers’ money is protected by the Financial Services Compensation Scheme.
Bondholders appear to have agreed to the deal because they feared that, otherwise, the society would have been split up as the Dunfermline Building Society was. Nationwide Building Society took on its savings book and its mortgage loans were left with the Government but Dunfermline’s bondholders are unlikely to recoup anything.
Although the debt-for-equity swap will stabilise West Brom, the tripartite authorities are understood to remain eager for the society to be sold. That is likely to involve a break-up, with another mutual or a bank taking its savings book and branches and the Government taking control of the mortgage book under its new Special Resolution Regime.
Advertisement
Mr Sharpe took over as chief executive in October last year after the abrupt exit of Stephen Karle after just two years in the role. At the time, the society insisted that it had no financial problems and was not coming under scrutiny from City regulators.
Today’s results, which show an 18 per cent jump in retail savings to £6.5 billion, were also hit by a £10.9 million property writedown and a £12 million charge from the Financial Services Compensation Scheme.
Excluding one-off items, the society suffered a fall in operating profits from £46.1 million to £38.7 million. It said that the results showed it was “clear there is a need to refocus strategically and address head-on those issues which have been responsible for the recent poor performance”.
The new strategy would involve a move to being predominantly funded by retail savings, with a target of cutting the level of non-retail funding to below 15 per cent by the end of March 2010.
It said that it would also withdraw from commercial and buy-to-let mortgages to focus on prime residential lending in its West Midlands heartland.
Advertisement
Total assets on its balance sheet fell from £9.6 billion to £9.2 billion, while its liabilities fell from £9.2 billion to £8.86 billion.
West Brom, founded in 1849 as The Co-operative Steelworkers’ Society of West Bromwich, found notoriety in the mid-1990s when it was roundly criticised for selling unsuitable home income plans to elderly investors.