Monday, 21 June 2021

Manchester BS Comes Good!

In the DIY Income Investor approach I try to put a brake on the most obvious behavioural biases that often hamper investors. For example, I have buying and selling 'rules' that curb the instinct to buy too quickly ("Ooh, it's shiny") - and sell too quickly ("Ooh, look how much money I've made").

However, my latest dilemma is not so easily resolved...

This story is a little long, but you can skip to the end if you like.

The concept of Building Society PIBS (Permanent Interest-Bearing Shares) has fallen out of favour - which is sad for DIY Income Investors, as they were nice little earners. It is/was a kind of hybrid between preference shares and corporate bonds, peculiar to UK Building Societies.  Many PIBS offered great yields - but some have been horror stories. 

I first bought Manchester Building Society 8% PIBS (MBSR) in 2013 when it had a yield of 9%, but appeared - even then - to be risky. There were some other  horror stories with building society PIBSs. The Building Society then appeared to stabilise, although it remained a small, and therefore potentially vulnerable operation.

The following year (2014) I realised that the price of the PIBS had increased by nearly 25% (plus interest earned) in a short 12 months. I also realised that the wider economic background in the UK at that time continued to point to an increase in interest rates. And that would have meant a fall in the price of all fixed-income securities, like PIBS.

Now, my normal 'sell' rule - developed to restrain the natural urge to grab a profit - is to wait until the capital gain exceeds fives times the current annual income. In this case the indicator needle barely reached 2.7 and the yield was still an attractive 7.3%. But my rational brain said: the wider situation is temporarily unusual. This was the rationale for other recent sales of fixed-income securities: the only way (for the price) is down. Probably.

So I sold, taking my profit, selling my 86p shares for £1.08.

Roll on to 2016, when the MBSR| price had dropped to the mid-60p range. The Building Society had hit hard times, reporting a loss for 2015 and the long-term future of the society was in question. In the 2015 Annual Accounts the Group had negative accounting reserves of £5.6m.

The news caused a 40% drop in market price of the 8% PIBS, meaning that the yield on them shot up to around 12%. This was an almost unheard-of yield in the current market and was twice my cash yield (and, as it happens, was too good to be true!)

So - I wondered - what happens if the Society goes bust or is taken over? I thought it was most unlikely that the Society would be allowed to fail, so - in my mind - a takeover was the most likely outcome. This could have the following result for the PIBS:
  • no change: unlikely, as this would represent very expensive capital for the new owner
  • repurchase at face value (i.e. £1): possible, but unlikely, because of the cost
  • offer of repurchase at a premium to the market price (but less than the face value): the most likely option in my opinion
So I decided to take a gamble and bought two tranches for 69p and 64p.

There was, of course, another option that I had not considered sufficiently: the cessation of interest payments. Bang! The Building Society announced that no interest would be payable because of the lack of capital and the shaky financial standing. The price of MBSR plummeted to 20p or so. 

Over the following years no interest has been paid, although the price slowed increased to around 40p recently. Then today the price shot up to over 80p. The reason? A substantial Supreme Court ruling against auditor Grant Thornton, which - I guess - had not spotted the problems in the Society's balance sheet. 

Today's decision is therefore whether to sell (finally) or hold on for potential interest payments and further price appreciation. Well, it seems to me that the worst is over and I think I will hang on.

Update 26/6/21: It looks like the price has stabilised. It is not a brilliant business and the price has recovered only due to the court award, so I have decided to take my profit now, giving only a 19% capital gain - but better than the big loss I was looking at only a few days ago. [Sale price £0.795]

I am not a financial adviser 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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