We've talked about PIBS (Permanent Interest-Bearing Shares) several times before, highlighting both the high fixed returns and the risks. PIBS are typically issued by Building Societies (the US equivalent would be Savings & Loan banks) and many PIBS offer high yields.
The Principality 7% PIBS - issued by the Principality Building Society (in Wales) - is a case in point: depending on how you look at it, it may be a bargain or a poor investment.
The PIBS has a coupon of 7% and must be bought in minimum chunks of 1,000. On the face of it, the Principality PIBS is very attractive; because the security is priced significantly below 'par', as it currently offers (according to Fixedincomeinvestments.com) a current yield of 9.6% and a yield-to-call of 12.5% (and don't forget that you need to understand your different types of yield). But therein lies the valuation problem, as this PIBS is callable in 2020 - but it might not be!
What if they don't call the PIBS? After all the Principality has already done this just recently, holding onto the capital and leaving investors high and dry with a relatively low yield.
As we have highlighted before, in many cases the issuer does not have to redeem the security's par (or nominal) value but has the option of extending the loan - but at a different, lower yield. In the case of the Principality PIBS, the 'run-on' rate is the 5-year gilt rate + 3%; what is more, this can be extended indefinitely, resetting the rate every 5 years.
Investor's Chronicle has recently reviewed this security. It noted that 5-year gilts are currently just over 1%, and that the group's first-half statement for 2011 suggests it's weathering the downturn fairly well. Profits are gently rising, impairment is falling and core tier-one capital stands at a healthy 11.6 per cent.
The Motley Fool forum has discussed these PIBS: the Building Society appears to be doing well. More interestingly, one commentator noted that the current gilt rates are depressed and will probably return to higher, historical levels - possibly around 3% for 5-year gilts. That would change the risk/reward equation. Also, for regulatory reasons, the Building Society may well decide call the PIBS if it becomes this 'expensive'.
So, if the PIBS are not called, returns might be:
- 9.6% until 2020 (i.e. 8 years)
- then the equivalent of 5.5-6% (or possibly more, based on the current discount and the 'run-on' rate) between 2020 and 2025
What do you think: Welsh gold or Fool's gold?
[Purchase price: 75p]
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.