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West Brom may escape break-up

Robert Peston | 17:16 UK time, Thursday, 11 June 2009

West Bromwich has just put out a statement which implies that it will - almost certainly - avoid being broken up and put into the Special Resolution Regime run by the Bank of England.

Instead it appears to be on course to persuade holders of its so-called subordinated debt - some £182.5m of it - to convert this debt into capital.

It's a clever way to avoid insolvency, by creating new capital that can absorb future losses on imprudent lending.

This doesn't mean that West Brom will remain independent however. A merger with the likes of Coventry BS may still be the best way forward.

But it would buy West Brom the time to make the decision on its future in a controlled an orderly way.

Here's the West Brom statement:

"West Bromwich Building Society is in advanced discussions with holders of the Society's subordinated debt to exchange the full outstanding principal amount of the Society's subordinated debt, totalling £182.5 million, for a new instrument which will qualify as core tier 1 capital.
"Such a transaction would materially strengthen the Society's core tier 1 capital ratio as well as improving quality of the Society's capital base. The Society expects to make a further announcement with respect to this transaction in due course."

UPDATE, 17:30: The moment of most acute difficulties for Britain's banks and building societies is passed.

But that doesn't mean it's plain sailing for all of them - especially if like West Bromwich Building Society they've become too exposed to the commercial property and buy-to-let markets.

Building societies face a particular difficulty when they incur losses - which is that it's especially hard for them to raise new equity capital to absorb such losses, to say afloat.

So what's happening at West Brom today may represent something of a breakthrough.

The society seems to be on course to persuade holders of £182.5m of so called subordinated debt to convert this debt into what it calls "a new instrument" which would be the equivalent of core capital.

This may sound like mumbo jumbo.

But what it means is that West Brom is acquiring a buffer to absorb losses and avoid insolvency.

If it succeeds there will have been a last minute escape from a grisly fate. Because the alternative for this 160-year-old pillar of the Midlands economy was to be broken up, with West Brom's savers going to another society and its assets wound up, under the management of the Bank of England.

Comments

  • Comment number 1.

    West Bromwich 0 Coventry 1

  • Comment number 2.

    Robert,

    Where did the West Brom make these losses? Buy to Let and commercial property! (apparently)

    This is no imported American crisis (as the politicians claim) - it is a home grown one (caused in part by inadequate regulation and too low interest rates).

    (MMG = Mervyn Must Go)

  • Comment number 3.

    Robert, a thought; unlike the Dunfermline BS, didn't the West Brom satisfy the stress tests put in place to satisfy the Credit Guarantee Scheme? So what has changed since? Are the stress tests stringent enough?

  • Comment number 4.

    Re...Buy to Let.
    It is now obvious that losses from buy-to-let reposessions are being handed to the taxpayer on a grand scale.
    That means that, in future, THE TAXPAYER IS GOING TO BE SUPPORTING AND PROPPING-UP PROPERTY SPECULATION.
    (Buy-to-let is nothing more than property speculation).
    So, in my view, anyone who buys a buy-to-let property SHOULD PUT THEIR PRIMARY RESIDENCE UP AS COLLATERAL FOR THE PURCHASE, and should never recieve more than a 50% mortgage for the buy-to-let property.
    THE TAXPAYER CANNOT SPONSOR PROPERTY SPECULATION....that is immoral and an almost fraudulent basis.

  • Comment number 5.

    Can the owners of the Mutual society now advertise for new executives (probably at less pay) to replace the ones that messed it all up...?

  • Comment number 6.

    The question is why should Banks and BSocs be treated differently than other businesses facing problems, because there are plenty about. If this cannot be explained then it really is all mumbo jumbo.

  • Comment number 7.

    I thought that was about the football club. Doh.

  • Comment number 8.

    Robert

    Stevewo #4 said: "Buy-to-let is nothing more than property speculation".

    Absolutely true. And in a capitalist society, property speculators should be allowed to go to the wall.

    Any good reason why these people, and the fools that lent them the money, should be subsidised and propped up?

  • Comment number 9.

    So why wasn't the Dunfermline allowed to do this?

  • Comment number 10.

    Provincial building societies are so boring - no one cares. Very unlikely that any rich people have money with the West Bromwich - most likely a few pensioners and unemployed or soon to be unemployed. Let them lose their money and then claim benefit like everyone else.

    Obviously the senior management need looking after, but surely you can just inflate their pensions and let them go back to the City or wherever they came from.

    The recession is over, there is no need to let some unknown building society spoil the feelgood factor.

  • Comment number 11.

    Pay attention folks...this all means that the taxpayer does not need to get involved in West Brom building society at all!

    So taxpayers are bearing no loss (#4), the executives haven't screwed up quite as badly as all that (#5) - though the members might want to replace them anyway, and they are being treated exactly like a normal business (#6).

    But #6 asks a good question: why are banks in general not like normal businesses? I've written an answer to that if you want to find out more:

    https://www.knowingandmaking.com/2009/06/why-are-banks-not-like-ordinary.html

  • Comment number 12.

    Does anyone know if Pibs are classed as 'subordinated debt'?
    Joh C.

  • Comment number 13.

    Good comments as usual from JFH.

    We're not seeing the end of the recession - only the effects of QE coming through.

    The UK Economy is like a starving body, getting a last burst of energy, as it consumes its own internal organs.

  • Comment number 14.

    #10. armagediontimes wrote:

    "Provincial building societies are so boring - no one cares...The recession is over, there is no need to let some unknown building society spoil the feelgood factor."

    How crass! I hope your post was intended to be an exercise in irony! Otherwise you are so sad! But joking about others less fortunate than you is in extremely bad taste!

  • Comment number 15.

    6#

    "The question is why should Banks and BSocs be treated differently than other businesses facing problems, because there are plenty about. If this cannot be explained then it really is all mumbo jumbo."

    Let me help you.

    'One sunny afternoon, you go along to your frendly local ATM, and low and behold, nothing comes out. You didn't put any money in the matress (or your doughter chucked it out) so you visit your friendly next door neigbour and ask if he can lend you a couple of bob. UNfortunately, his hole in the wall also produced squat and he's in the same boat as you. So now you have to go home and starve.'

    Personally i think we should let them sink.

  • Comment number 16.

    I've read the article and comments again, and as far as I can see, the taxpayer IS bailing out this society. (And the other banks and societies.)
    That means that fat profits from buy-to-let will always go into private pockets, whilst thumping great losses are being given to the taxpayer.
    Buy-to-let must either be abandoned as a concept or put on the footing I described in comment 4.
    So you and I are only ever going to be lumbered with the losses, the buy-to-let landlord will take the profit!
    Sorry to be a little impolite, but that stinks!

  • Comment number 17.

    #4 - e2toe4
    The new chief exec has removed all the previous exec directors

  • Comment number 18.

    # re 17 pd-blogreader... good.... thanks for the info...

    I have popped back from the cricket ... that's like the economy....

    Recession against Netherlands..gloom
    Green shoots against Pakistan ...great!!
    Reality returns against South Africa as the double dip sets in even more gloomily than before...

    Just like the economy .... really

  • Comment number 19.

    More depressing Preston gloom!

    On what evidence does Preston suggest that a merger will take place with the Coventry - non at all!

    This recapatalisation means that there is no reason why the West Brom can't continue as an independent Mutual Building Society.

    We need to stop this obsession with big is brill and support and sustain locally based mutual organisations

  • Comment number 20.

    One for you wonks and/or Robert - according to the West Brom Pillar 3 disclosures March 2008 it had 330m retained earnings stuff plus 77.1m Permanent Interest Bearing Shares - PIBS- ( ? what are these and how do they work for a mutual cos the interest looks to be via a discretionary dividend and mutuals are supposed to be run for the benefit of members/savers I thought). Under pressure of Special Resolution action as I read Robert's comment, note holders exchange 182.5m notes subordinated to depositors, all creditors and existing PIBS holders for ?182.5m new PIBS or something like them.Otherwise they lose their debt on break-up? Assuming the retained earnings stuff and old PIBS were to remain the same, that might increase Tier One to ? maybe 559.6m less bits n pieces - say,259.1m of which might be PIBS equity? How does this solve their problem - does it just convert debt(liability) to equity (asset) and get shot of interest payments on the notes and give more room for rightdowns of losses in the books? Is that the clever stuff here? Are depositors safer/better off then with all these PIBS issued or do they rely on HMG as ever? Do West Brom's creditors/money market lenders still rely on HMG guarantee ultimately-anyway? If so, what's the deal?

  • Comment number 21.

    So let me get this straight. Yesterday we are told of a possible recovery in the economy and today we have another Bank fail(Yeh OK it a Building Society, is there really any differnce when you take into consideration their investment/risk management strategy).

    We're being ripped off again. The system needs to default. The sooner the better.

  • Comment number 22.

    buy to let isn't a problem
    its buy to let with a big loan to value mortgage


  • Comment number 23.

    Although I have been following Robert Teston for some time now, today was the first time I saw him on the TV. He reminds me of Doctor Who - looks like David Tennant, speaks like David Tennant and appears to know it all, again like, Doctor Who. Only this time, it is for real!

  • Comment number 24.

    OH YAWN yet another EXAMPLE of the FACT the REGULATORS & THE B of E have

    and HAD no clue as to what the LENDERS were really UP to between 1999

    through to NOW?

  • Comment number 25.

    #20

    Could us lesser mortals please have a translation of the tradespeak here. I for one would like to know what you are actually saying.

  • Comment number 26.

    Having watched Robert on the News, I realise that this society is not yet at the point of a taxpayer bailout.
    Apologies to all.
    However, I still think that the taxpayer should not be the guarantor of last resort for all those buy-to-let mortgages.
    But-to-let is a business....people are seeking to make money....they are not looking to house themselves or their family.

  • Comment number 27.

    As soon as I saw the words 'debt being sold as capital' I realised that we really haven't learnt anything.

  • Comment number 28.

    I agree with stevewo at 4, another example of the tax payer being riped off by the very banks and financial institutions who caused all this mess in the first place. It appears that it is win win for the mortgage providers as when people default on their borrowings, they reposses the property and sell it on at a probable loss at auction. The thing is that the tax payer picks up the bill for the loss, the original borrower still owes the bank/building society the difference between borrowing on the property and auction sale, the people who purchase the property at auction have probably borrowed the money from the very mortgage providers who started the process in the first place !!!!.

    What a con we all fell for, and are still falling for because our right honourable members are not right or honourable, just members of the male and female kind.

  • Comment number 29.

    Stevewo (various #)

    Whilst I agree with your comments about buy-to-let being a business, it applies to many but is not universally so. As a member of HM Forces, I have had to let out my one and only property while working overseas, paying tax on it of course! I do not do this 'as a business' with intent to speculate, but to come back and live in it longer term. I also let out of necessity as I have to rent property overseas. My building society only gave me grace for so long on a normal mortgage before forcing me to take a more expensive buy-to-let mortgage. Nevertheless, I am not prospective trouble, since I have built up a reasonable equity in it!

    Dai

  • Comment number 30.

    #23 KashifIrfan

    You've JUST realised that he looks like David Tennant? Maybe the BBC are already thinking of turning the credit crunch into a drama...

    Too late.

  • Comment number 31.

    Re 29 DaiOBollical...

    Members of the armed forces are excluded from my criticism.
    This is one sort of "buy-to-let" that is absolutely justified, and all taxpayers would be happy to bear any losses associated with it.
    In fact, I would have thought it the duty of any government to make good any losses you or your colleagues may acquire from the necessity to rent out your property.
    The real target of my anger is all those "urban speculators" out there who thought they could get rich quick by entering the buy-to-let frenzy, but who have instead dumped the losses on the rest of us.
    Where would the profits have gone?.....in their pockets, of course.
    In my opinion, all members of the armed forces are underpaid, whilst clearly incompetent bankers are ridiculously overpaid.

  • Comment number 32.

    #31

    I'm not sure why you are just excusing the armed forces from your critique. There are probably hundreds of reasons why people take out buy-to-let mrtgages. Just one off the top of my head....oh, yes my widowed mother needs a full time nursing home with 24 hour care, so we've had to rent out her home to pay for the fees, and the only way is to change her mortgage.

    Please just don't tar everybody with your own tainted morals.

    In any case the only people who are being *bailed out* in this affair are the savers. The borrowers have to stand on their own two feet, and will end up paying handsomely for their (and the bank's) mistakes.

  • Comment number 33.

    #31 Stevo

    Thanks for the support. We need it at times!!

    As I say, I was in support of your general message. As so often, though, the generalisation can affect some innocent bystanders!

    Dai

 

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