Monday 19 September 2011

PIBs For High Returns - But With Risk (UK)

I have examined PIBS as a potential investment in a previous post and subsquently bought Nationwide PIBS (Permanent Interest-Bearing Shares), which at the time were yielding 7.7%. PIBS are special shares issued by building societies (similar to US Savings & Loan banks) that pay a fixed rate of interest. They cannot (usually) be sold back to the society but can be bought and sold on the stock exchange, which means the price varies.

A PIBS is similar in character to a Corporate Bond and therefore forms part of my Level 7 holdings on the DIY Income Investor Income Pyramid - the most risky tranche of investments.

The yields on PIBS are attractive - but there are the risks and you will need to tread carefully and do your research. A bit like rock climbing - exhilarating but potentially dangerous!

In the past two decades, building societies including Nationwide, Newcastle, Leeds, Principality, Manchester, Nottingham and Skipton have issued PIBS. Most were issued when interest rates were much higher than today and as a result pay a 'coupon' - annual interest - of up to 13p for each £1 share originally issued.

A recent article in The Daily Mail has highlighted that building societies are paying some PIBS investors a return of up to 13% . This is a hugely higher rate than ordinary depositors in building societies can hope to obtain. 

It quotes, for example, Newcastle Building Society's 10.75% PIBS issued about 20 years ago, currently priced in the market at 104p, giving a gross yield (before tax) of 10.3%, a yield that reflects, among other factors, the society's comparative financial weakness. By contrast, PIBS issued by Nationwide, the biggest and most secure of all societies, yield about 7%.

Like bonds, PIBS can change hands once issued in a 'secondary market',where the market price agreed is based largely on two factors - the coupon paid by the PIBS and the risk that the building society behind it could go bust.

A PIBS is usually pays interest 'permanently', unless:
  • the issuer cannot afford it 
  • the issuer 'calls' the PIBS (i.e. refunds the face value)

Examples of PIBS 'defaults' include:
  • After the collapses of Northern Rock and Bradford & Bingley, PIBS investors with these societies were eventually offered cash equivalent to about one third of their face value
  • after Lloyds' takeover of HBOS some PIBS investors were forced to sell attractive PIBS holdings, often against their wishes
  • the restructuring of West Bromwich building society in 2009 hit are PIBS investors by sweeping away their future entitlement to interest, causing the Pibs' price to fall by about 80^
  • in the Bank of Ireland PIBS default, UK investors were initially treated quite unfairly

Investors in PIBS should be aware that their money, unlike cash in a deposit account, is not protected by the UK Financial Services Compensation Scheme. So tread carefully - but do explore this area of relatively high returns. A good place to start is This Is Money's PIBS page or the Fixed Income Investments' PIBS page.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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