Wednesday 25 April 2012

Portfolio Buy: Principality 7% PIBS

I've come over all Welsh - but am I chasing after Fool's Gold or have I really found a seam of gold.

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 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
  • etc.
However, if they are called in 2020, the overall yield would be 12.5% - hard to beat!

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.


  1. Yes I have some of these myself, along with NWBD, LLPC (still waitin for div announcement!), AV.A and so on. I was also checking out OneSavings (formerly Kent Reliance Building Society) ones but found them a bit opaque, so bought these instead.

    1. Why did you think OneSavings opaque. Personally I prefer that J C Flowers are on board to the "a mutual looking for a disaster to hit them" that is Principality. However, having got a wedge of OneSaving I'm looking for more PIBS with reset rates that are benchmark+, thus I've alighted on this stock. P.S. I also have shed loads (for me) of NWBD

  2. I think PIBS might have a place in some private investors' portfolio but it's amazing to me how the perceived risks of these securities have changed over the past few years. They used to be seen as pretty much rock solid nest eggs for OAPs, whereas now they do seem a bit risky and illiquid.