PERSONAL ACCOUNT

Some ‘Pibs’ holders have had a terrible time. Should you always avoid these assets?

It’s been a bad week for holders of bonds issued by the Co-operative Bank, who are to be offered just 55p for each £1 bond (or possibly even less) in a restructuring designed to keep the lender out of bankruptcy.

This is depressing enough for anyone who bought the bonds on the open market in the past few years but even worse for investors who received them in exchange for other bonds in the bank’s first refinancing in 2014: those holders were forced to accept a loss then too, of about 50pc.

And that’s not the end of it either. The Co-op doesn’t know how many bondholders will be eligible for its new offer of cash in exchange for the bonds. Should it be a large number, the amount each investor receives will be scaled back further because the total pot for compensation is capped.

So in the end, investors who had held the original bonds could get only 20pc of their original investment back – perhaps even less.

Those original bonds were actually a special type of investment issued by building societies called “permanent interest-bearing shares” or Pibs. In this case the Pibs were issued by Britannia Building Society, which the Co-op took over in 2009.

Pibs were once seen as boring, dependable investments issued by, well, boring, dependable institutions and bought by income-seeking savers, such as pensioners. A series of events slowly changed this.

First, deregulation broke down the former distinction between building societies, as organisations that used savers’ deposits to fund other members’ residential mortgages, and banks, which used to be largely concerned with running current accounts for individuals and providing finance to businesses.

When banks started to make significant inroads into the mutuals’ former monopoly on home mortgages, the latter responded by becoming more like banks, diversifying into areas such as commercial property lending, for which they were not really equipped.

When the financial crisis struck, societies that had diversified unwisely found themselves making big losses and unable to raise new money on the financial markets. Some were taken over, some more or less failed. Several defaulted on their Pibs.

Those who had invested in Britannia Pibs were especially unlucky as their society not only got into trouble while an independent entity (thanks to an ill-starred foray into commercial property lending) but was then “rescued” by a bank that would go on to dig itself into ever deeper trouble.

Those investors will probably now have no choice but to take whatever money they are offered in the restructuring and stomach the loss, although it’s worth saying in passing that the rescue deal involves the

The Co-op Bank ‘rescued’ Britannia Building Society but then got into more trouble, leaving Pibs holders stranded