Saturday, 23 March 2013

A Look at PIBS


Permanent interest bearing shares - PIBS - are issued by building societies as a way of raising capital. They are listed on the stock exchange and can be traded much like any other security. The main attraction for income investors is the higher rate of interest on offer - typically 6% - 8% at current prices.

They pay a fixed rate of interest (coupon) every six months and although it will be taxable just like interest on a deposit account, it is paid gross so if held within a pension, sipp or ISA, there is no tax to pay. Also useful if you are a non tax payer.

The purchase process is a little different from shares and funds - for a start, you cannot  buy directly online, you will need to give your broker a call and deal via a telephone trade. With some brokers, this will be more expensive - for example my broker, Sippdeal charge £20 more for a telephone trade. This is offset by the fact there is no stamp duty to pay. The other aspect is you will need to allow for the additional cost of the accrued interest since the last payment - you will, of course, get the full 6 months interest on the next payment date.

In 2007/08 at the start of the economic banking meltdown, some of the former building societies which had demutualised got into difficulties and many investors holding  PIBS in the likes of Bradford & Bingley and Northern Rock lost money. The holders of PIBS rank behind all other lenders and depositors and whilst ordinary savers are protected by the FSCS for the fist £85,000 of savings, no such protection is afforded to holders of PIBS.

Anyone considering them as a possibility should therefore ensure they are satisfied regarding the strength of the building society issuing the PIBS.

Coupon Reset

The other main consideration is that, unlike conventional bonds, many PIBS do not have a fixed redemption date. Some will have a ‘call’ date but whether the PIBS are redeemed will be at the issuers discretion. Prior to 2008, it would have been almost unheard of for a building society not to redeem its PIBS on the call date - more recently we have seen a number of societies choosing to ‘reset’ the rates at much lower levels, often just 1% or 2% above the interbank lending rate (LIBOR). This can have the effect of reducing yields from 7% or 8% down to 2% or 3%.

Another option taken by the Nationwide BS recently is to offer to buy back the PIBS near to the call date at below the issue price, but above the then market price.

Inflation

As with all fixed interest investments, the level of income may be attractive at the start - especially compared to savings rates - but as the income never rises, it will become worth less over time due to inflation. When the Bank of England throws more and more money into the system in the form of QE and Funding for Lending Scheme, there is always the danger this will cause inflation to rise.

I have taken a calculated punt on PIBS for some of the fixed interest portion of my portfolio - the main holdings are with the Coventry BS (see post) and the UKs largest mutual, the Nationwide. As I said in “DIY Pensions”, I am currently looking for opportunities to diversify so could well reduce the proportion of some PIBS over the next year or two. Some of the retail bonds for example could be worth taking up.

I will take a look at other forms of investing for fixed interest in a future post. As ever, please DYOR - a good place to start is the excellent Fixed Income Investment website run by Mark Taber.

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