CAPITAL CHANGE

The recent events at West Bromwich Building Society led to a collective sigh of relief in our sector. For some weeks there has been speculation that the West Brom could go the way of the Dunfermline Building Society and some of the media seemed to extract glee from the difficulties faced by another mutual. Thankfully West Brom has confounded these cynics by gaining access to a new form of capital which will allow the society to swap some subordinated debt for a new instrument called Profit Participating Deferred Shares. (PPDS). This means that the West Brom ( and presumably other societies) can benefit from the flexibility and percieved higher quality of tier 1 capital through PPDS rather than rely on the more rigid and less favoured (as the name suggests) subordinated debt which typically exists in the form of long term loans with a fixed interest rate payable.
However the new PPDS leaves the West Brom (and the building society sector) with a new conundrum. Mutuals don't have to maximise profits for shareholder yield.But holders of PPDS may well seek maximum returns.How will societies with PPDS balance the needs of mutual members ( savers and borrowers) with the potentially divergent needs of PPDS holders? Watch this space!