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.