The only way is up for the ‘baggies’

It must feel like hard times have arrived in West Bromwich. Firstly your football team drops out of the premiership and them it looked like the building society is going to go bust. However a rescue is on the horizon with the news that the the society has converted its outstanding debt of £182.5m into a new financial instrument, profit participatory deferred shares (PPDS), to avoid a bail out by the taxpayer and to build their capital reserves. This new instrument is treated as tier one capital and can absorb losses from bad debts.

Building societies often have fewer ways to raise new capital as they are owned by their members and have no access to the stock markets. This new instrument on the other hand provides access to good quality capital but comes at price.

West Bromwich building society has agreed to pay up to 25% of future post tax profit as a dividend to new PPDS holders. Robert Sharpe, West Bromwich building society’s CEO, denies however that this would result in paying a large proportion of profit to debt holders. PPDS have been likened to permanent interest bearing shares (PIB), as dividends on PPDS are only payable with approval from the building societies board. This does however raise questions over whether PIB holders will be paid if the board decides not decide to give a dividend for PPDS holders.

Irrespective of the details of the debate, the move is to be encouraged and those involved in its creation congratulated. We need viable and vibrant building societies to reconnect Financial Services with the public. Further dislocation and harm can only be the result if businesses like the West Bromwich are forced into the arms of larger institutions that are increasingly perceived, from a customer service and pricing perspective, as no better that the major banks.

Now the West Bromwich is safe, what’s the chance for an immediate return to the premiership for the baggies. We would not bet against it!