Although building societies are owned by their members, some also have ‘shareholders’. However, building society shareholders have a very limited role – they are investors, with no additional votes beyond their status as society members.
Holders of building societies’ ‘permanent interest bearing shares’ (PIBS) are the equivalent of bondholders in a bank, or other company. And this is where the problem originates for investors in PIBS issued by the former Bristol & West Building Society. When the society was acquired by the Bank of Ireland, the holders of PIBS were automatically treated by the Bank of Ireland as bondholders.
There are similarities between the holders of PIBS and bank bondholders. In both cases the holders of the investments are not preferential creditors in the event of a collapse of the business and they receive a good rate of interest to compensate for the risk they enter into.
However, there are also significant differences between the positions of PIBS holders and bank bondholders. Bondholders understand the risks they are taking, or they should do if properly advised, and enter into these risks knowingly. This was not necessarily true for those who invested in Bristol & West PIBS.
Building societies are traditionally low risk financial institutions. Until the global financial crisis, few people expected societies to hit serious trouble –especially a strong and stable institution like Bristol & West. Moreover, in the 1990s, when the Bristol & West PIBS were issued, it was not realistic to predict that it would be taken over – let alone by a foreign institution.
The Bank of Ireland hit very serious trouble after it acquired Bristol & West. The financial crisis that rocked Ireland hit the Bank badly, causing it to pull back from some of its UK engagement. It does, though, still have a major financial services joint venture with the Post Office.
In 2009, Bank of Ireland had to make provisions of €4.5bn for potential losses on loans for commercial and residential properties and development schemes, after the Irish property boom went to bust. As a result, the bank required over €5bn in extra capital to cover actual and potential losses. With the support of the Irish government and new investors, the bank has survived – but its bondholders had to accept large write-downs (or ‘haircuts’) on their investments.
This is where we come to the £75m in PIBS issued by the former Bristol & West Building Society. Under the terms of an offer to buy-back the bonds, the Bank of Ireland offered the over 3,000 holders of PIBS less than 20% of their surface value. This led to a vigorous campaign, and a legal action, on behalf of the PIBS holders. Bank of Ireland relented and made a revised offer, which was twice as good as the previous one – but still involved PIBS holders losing 60% of the value of their investments. That offer expired last month, with many of the PIBS holders again rejecting or ignoring the offer.
Holders of PIBS who held out are campaigning for a more generous outcome. Issues include whether the Bank of Ireland should still be regarded as a ‘basket case’; whether the largely successful recapitalisation means the bank can be treated as healthy; and whether holders of PIBS have a legitimate and ethical case to be treated as a special case. The Bank of Ireland and the Central Bank of Ireland – as regulator of the banking sector – clearly feel that the PIBS holders have already been treated generously, compared to Bank of Ireland’s own bondholders.
Leading the campaign against the position of the Bank of Ireland and the Central Bank, representing many elderly investors, is Mark Taber of advisors Fixed Income Investments. Taber points to recent remarks by Ireland’s finance minister Michael Noonan – when he was trying to reassure the markets – that the Bank of Ireland is now “if anything, over-capitalised”. This suggests, says Taber, that BoI does now have the capacity to fully honour the Bristol & West PIBS.
One of the points made by Taber in his continuing correspondence with the two Irish banks is that holders of the PIBS could not have expected this outcome when the shares were issued and that the Irish regulator has let them down in the supervision of the Bank. He points to the Scheme of Arrangement for transferring oversight of the Bristol & West PIBS to the Irish regulator in 2007. This stated: “In addition to seeking Court approval of the Transfer, Bristol & West and the Bank of Ireland have been working closely with the regulators, the FSA and the Irish Regulator, to help ensure that their customers are not adversely affected by the Transfer.” In practice, says Taber, this assurance proved false.
In his most recent correspondence, Mark wrote: “The Central Bank of Ireland accepted responsibility for regulating the issuer of the former B&W PIBS, which were known to be held by thousands of small, unsophisticated UK investors, and should honour its commitment to ensure that they are not adversely affected by the Transfer. This should include ensuring that they are not adversely affected by the change of regulator, country of issuer and law of remedy applying to their investments. To date the Central Bank has completely failed in this regard.”
Taber says that it is unfair that vulnerable and mostly elderly holders of PIBS were given offers with short deadlines, with the potential alternative that the investments could become completely worthless. He argues that while this was approved by Ireland’s Central Bank, such an arrangement would never have been accepted by the UK’s Financial Services Authority. Mark suggests that this violates the promise made when supervision of the PIBS was transferred to Ireland.
However, as far as the Bank of Ireland is concerned, the matter is fully resolved. A spokeswoman told the News: “The offer has concluded. We have no further comment.”
Even if, as the Bank of Ireland hopes, that dispute is history, it highlights the fact that holding PIBS can be more risky than some investors had assumed. Other building societies have also issued PIBS, including the Nationwide and the Kent Reliance – which controversially entered into a joint venture with JC Flowers to take over its operations last year. This raises interesting questions for those investors in Kent Reliance.
A spokeswoman for Kent Reliance said: “The status of the PIBS changed on vesting [when the joint venture took over the operations of the building society]. They have been replaced with instruments with the same value for the same holders: they were replaced with perpetual subordinated bonds.”
No doubt holders of the former Kent Reliance Building Society PIBS will hope that the experience of the Bristol & West PIBS is not repeated.