west Brom: three-quarters mutual

» By kashmeer | the 06-14-2009 at 23:26 | 49 views (22 unique) | 0 comments | Report post!

The Barclays sale of BGI may be today's whopping deal (see my earlier note), but the rescue of West Bromwich is more interesting.

How so? Well it's the conversion of £182.5m in subordinated debt into a brand new form of capital - approved by the FSA - that sets the pulse racing (well, it does if you are a sad obsessive about these things - a big hello from me).

The point is that the Profit Participating Deferred Shares to be issued to institutions in exchange for the subordinated debt look a good deal like shares. They give their holders up to 25% of West Brom's future profits, at the discretion of the board.

In other words, West Brom has semi-demutualised without all the fuss of going through a stock market listing or obtaining the approval of its members.

The debt-for-equity swap will therefore be pretty controversial, I would expect.

And it will be fascinating to see if other capital-constrained societies take the opportunity to strengthen themselves by swapping debt for what looks and quacks quite a lot like ordinary shares.

In fact, the FSA has said this morning that societies may be able strengthen themselves by simply selling these almost-shares to new investors - even, just possibly, retail investors, including building-society members.

So perhaps these Profit Participating Deferred Shares will be the salvation of the beleaguered mutual sector - in that they will at last allow societies to raise capital from outside sources, thus bringing to an end the cruel cull of any society that makes a loss.

That said, there will be concerns that those societies which issue this stuff will have less ability to pass on all the financial benefits of their business to members.

They will therefore become semi-mutuals, a hybrid - and who knows what effect this cross-breeding will have on the behaviour of the beast over the long term?

For West Brom, however, doing this deal was probably a no-brainer. The alternative would have been the end of a 160-year history - with the business broken up and the assets put into run-off under the stewardship of the Bank of England.

As it happens, West Brom's results for 2008 (also just published) show that new management - appointed in the autumn of last year - has done a pretty impressive job of correcting the booboos of the last lot.

Reliance on flighty wholesale funding has been reduced. And the group has turned its back on racy, risky commercial property and buy-to-let loans to return to its roots as a substantial regional savings and mortgage provider.

In fact, it's just possible that this debt-for-equity swap is more than just a short-term rescue: it may allow West Brom to remain independent for the foreseeable future.

Presumably some in its home town will be looking to see if a similar fix can be found for the eponymous, relegated football team.
Isn't this just the same old same old "securitisation of debt" superstitious nonsense again? - the false allure of the alchemical transmogrification of lead into gold which rational people should know better than to give any credence to in the 21st century?

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