Co-op Bank Bonds to Shares

A friend was telling me about the problems people who hold certain Co-op bank bonds (earning between 5% and 13% interest) were expecting to experience - he thought it was terrible and that they were being ripped off, losing their life savings.
The bonds in question are known as PIBs (Permanent Interest Bearing shares), perpetual subordinated bonds and floating subordinated notes; it is the intention that they are replaced with shares. I could not believe half the things he was telling me - so I have been trying to understand the situation, and put some counter "facts" together for him The following is what I have gleaned from various places. It is more than likely that I have misunderstood articles that I have read - and got some "facts" wrong - if I have got anything wrong - or if anyone can throw further light on my understanding, it would be much appreciated. My disjointed claims:
A PIB is like an IOU or a bond in that it represents money that the lenders have lent to financial institutions. However, PIB issuers are under no obligation ever to repay the money - hence the "permanent" in the name. Holders receive variable dividends linked to the profits of the bank. Permanent interest-bearing shares and perpetual subordinated bonds will have been bought via a financial adviser or stockbroker; so anyone buying them should have been advised of the risk when they bought them. They are not something to enter in to lightly. Savers need to take great care when buying PIBS and their near equivalent, perpetual bonds, as both are stock market investments. The risk of losing some, or even all, of your money is much greater than with a bank or building society account. How much of your money you get back can depend on decisions by the institution and the price at which the PIBS trades in the market when you decide to sell.
Their rates of interest are not guaranteed either and can fall in some circumstances.
Co-op perpetual bonds are classed as junior subordinated debt which means they stand right at the back of the queue of creditors should the bank go under. I think that there are something like 15,000 individual Co-op savers with £65m invested in the bonds; the amount invested by individuals is only 0.05% of the total invested in bonds and is something less than £5,000 each on average For the current proposal to be implemented 77% of the bond-holders will have to agree - so it is not a foregone conclusion.
I read in one article that some Hedge Funds are actually currently investing in the bonds - speculating in order to make money from the current problems.
(Some of the current greatest criticism of the Co-op's solution is coming from the Daily Mail and Daily Telegraph. Ironic, as many people may have bought the bonds based on their previous readings of investment advice in these journals)
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Corrections and additions most welcome.
Reply to
Judith
:: A friend was telling me about the problems people who hold certain :: Co-op bank bonds (earning between 5% and 13% interest) were :: expecting to experience - he thought it was terrible and that they :: were being ripped off, losing their life savings. :: :: The bonds in question are known as PIBs (Permanent Interest Bearing :: shares), perpetual subordinated bonds and floating subordinated :: notes; it is the intention that they are replaced with shares. I :: could not believe half the things he was telling me - so I have been :: trying to understand the situation, and put some counter "facts" :: together for him The following is what I have gleaned from various :: places. It is more than likely that I have misunderstood articles :: that I have read - and got some "facts" wrong - if I have got :: anything wrong - or if anyone can throw further light on my :: understanding, it would be much appreciated. My disjointed claims: :: :: A PIB is like an IOU or a bond in that it represents money that the :: lenders have lent to financial institutions. However, PIB issuers :: are under no obligation ever to repay the money - hence the :: "permanent" in the name. Holders receive variable dividends linked :: to the profits of the bank. :: :: Permanent interest-bearing shares and perpetual subordinated bonds :: will have been bought via a financial adviser or stockbroker; so :: anyone buying them should have been advised of the risk when they :: bought them. They are not something to enter in to lightly. Savers :: need to take great care when buying PIBS and their near equivalent, :: perpetual bonds, as both are stock market investments. The risk of :: losing some, or even all, of your money is much greater than with a :: bank or building society account. How much of your money you get :: back can depend on decisions by the institution and the price at :: which the PIBS trades in the market when you decide to sell. :: :: Their rates of interest are not guaranteed either and can fall in :: some circumstances. :: :: Co-op perpetual bonds are classed as junior subordinated debt which :: means they stand right at the back of the queue of creditors should :: the bank go under. :: I think that there are something like 15,000 individual Co-op savers :: with 65m invested in the bonds; the amount invested by individuals :: is only 0.05% of the total invested in bonds and is something less :: than 5,000 each on average :: For the current proposal to be implemented 77% of the bond-holders :: will have to agree - so it is not a foregone conclusion. :: :: I read in one article that some Hedge Funds are actually currently :: investing in the bonds - speculating in order to make money from the :: current problems. :: :: (Some of the current greatest criticism of the Co-op's solution is :: coming from the Daily Mail and Daily Telegraph. Ironic, as many :: people may have bought the bonds based on their previous readings of :: investment advice in these journals) :: :: --------------------------------------------------------------------------------------------------------------------- :: :: Corrections and additions most welcome.
Since the CO-Op is an openly socialist bank, does this failure represent a crisis in socialism?
Reply to
Tired
The clue is in the interest rates. You can't get 13% interest without taking a risk.
I don't know the details of the Co-op bonds, but I doubt that the dividends are variable in that way. However, they can probably be stopped if the bank is doing badly - that's the whole point for the bank of issuing these instruments.
I wondered about doing that, too. Why not?
Reply to
GB
Not much, but for what you were paying me ....
The main contribution was correcting your utterly crass misunderstanding of the variability of the dividends.
Reply to
GB

Oh yes - the bit where you responded: "I don't know the details of the Co-op bonds, but I doubt that the dividends are variable in that way"
I'm sorry for my crass misunderstanding - and I was so pleased that you knew the details and were hence able to fully explain why my "understanding" was so wrong.
I thought I had read that some PIBs could have variable rates of interest - I am sorry that this was such a crass misunderstanding of the variability of the dividends and that there is no such thing.
I suppose I should have said something like: "It is more than likely that I have misunderstood articles that I have read - and got some "facts" wrong"
and then that would have brought out the helpful side in people.
Well thanks for clarifying that all PIBs are fixed rates - that's cleared up one of my errors.
Reply to
Judith
You're welcome. :)
It's nice to feel appreciated, so thanks for the feedback.
Reply to
GB
Not the first time this has happened. I had West Bromwich PIBs. They invited s to sue them! They have more money than us and if we lost we would have to pay their court costs.
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Co-op being a name know to all and who claim to be an ethical company naturally get more attention then other PIB's holders did when they were virtually robbed. Derek
Reply to
Derek F
The ones with the high interest were issued many years ago when interest rates were at an all time high.
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Derek
Reply to
Derek F
I'm not clear on what is meant by replaced with shares? AIUI PIBs are instruments used by building societies (which do not have shares). I'm not clear if co-op bank is a building society or a normal company with shares?
A company which does have shares would normally use a similar instrument called a preference share, which could indeed be converted into shares if default occurred (or under other contract specific circumstances).
I don't know much about PIBs but the idea of preference shares was to give investors a compromise in terms of risk vs reward between holding a safer bond with a fixed return and holding a more risky share which will lose money if the company does badly but may offer a potentially unlimited return if the company does well. Obviously if the company defaults you are stuffed either way.
Investing is gambling. The investor only has a claim to being ripped off if they were misled or poorly advised. Many investors only see potential rewards and choose to ignore clear caveats.
I could not believe half the
Reply to
Nick

I see that the Daily Telegraph,
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, and any number of other finance web pages are being utterly crass in misunderstanding the variability of the dividends. Perhaps you should write and explain to them.
Investors who buy PIBs when they are issued get the interest rate or "coupon" specified, which is normally fixed, although some rates are linked to benchmarks such as Libor.
PIBs provide an income (an interest payment). The rate is often quite high compared to rates offered by savings accounts, for example. The interest rate is called the ?coupon? and is normally a fixed rate, although some can be variable.
etc. etc.
Reply to
Judith

I agree - I have not seen any claim whatsoever that the Co-op customers were mis-sold the bonds. Whether they read the small print is a totally different matter.
Stocks and shares are gambling - the people who bought the bonds were gambling. and thought they had made a safe bet (if indeed they thought about it at all). They are now moaning because their bet is not paying out.
Reply to
Judith
Nah, they wouldn't be as absolutely lovely as you, mate.
Well done
Well done
The point is that the divis are not linked to company profits, which is where you blundered. But do keep digging.
Reply to
GB
The PIBs the Co-op are reneging on were issues by the Britannia Building Society later taken over by the Co-op
Most investors were probably a bit like me and understood PIBs. They had been around for quite some time and the degree of risk was regarded as minimal prior to Building Societies diverting from the path they had followed for years. Then several building societies bit the dust and had to be rescued or were taken over. For many years financial columnists had plugged PIBs and warned of a risk they did not believe would happen. Societies like West Brom had been covering up their true situation for some time. As PIBs are not quoted in the press holders seldom checked their value that normally did not vary much from month to month. I hold mine in a self select ISA and knew nothing of the situation until I was not credited my normal dividend in October 2010 when they only paid 2.04%. I queried the situation with my broker and it took them two months to come back with an incomplete answer. By that time I had already got the full story. Derek
Reply to
Derek F
Remember when Building Societies were as safe as houses:-) Anyone initially buying the West Brom PIBs would/should have read the prospectus
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Read thorough this part if you have the time or the inclination.
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Derek
Reply to
Derek F
PIBS are similar to Preference Shares in PLCs
They have a fixed percentage of interest on their face value (the value of the shares when issued), this will not vary. E.g. a PIB with a face value of one pound might pay of dividend of 7 pence each year.
But the market or (trade) value of these PIBS can go up or down, e.g. you might be able to buy a PIB with a face value of one pound which pays a 7 pence dividend for only 50 pence, in which case you would get 14% return each year on your investment.
Reply to
aaa

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