In the current low-interest-rate environment, many yield-seeking private investors have been willing to take extra risks for more income by buying permanent interest-bearing shares (Pibs). New EU regulations mean that these might become scarcer from next year. So what should investors do?
What are Pibs?
Pibs are permanent' in the sense that they usually have no fixed maturity date. But there are some Pibs out there that give the issuer the right to buy them back (known as a call option) on a specified future date.
High interest rates are the main attraction. It's not difficult to find Pibs paying interest rates of around 7% at the moment, but there are good reasons for this. Pibs are generally the last in the queue to get paid income or any proceeds on the winding up of a company.
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Also, as building societies are owned by their members, there are no shareholders to take the hit of any loan losses before them.
Things to bear in mind
Interest on Pibs is not cumulative. If a building society misses a payment, it does not have to make it up at a future date. Also, if the issuer is declared bankrupt, your Pibs investment is not covered by the Financial Services Compensation Scheme (FSCS).
Beware of floating-rate Pibs that have the option to reset their interest rates. With interest rates low at the moment, a building society with a Pibswith a historically high coupon has a very strong incentive to reset the coupon at today's lower rates.
Similarly, watch out for Pibs with call options, especially if you are looking for a long-term source of income. If you are thinking about buying a callable Pibs, you need to look at what is known as the yield to call' effectively your total return taking into account that the Pibs will be redeemed by the issuer.
As some Pibs have no maturity date, they are known as a long-duration investment. This makes them very sensitive to changes in the general level of interest rates. If interest rates rise sharply, then Pibs could see significant falls in value, potentially leaving you with big losses. The opposite of course applies if interest rates fall.
And although Pibs are bought and sold on the stock exchange, they can be difficult to trade as they are not very liquid investments this means you might not be able to sell when you want to. Watch out for big differences between the buying and the selling price of Pibs (the bid-offer spread) as you may find that your investment immediately takes a hit after buying it.
Do Pibs have a future?
New Pibs will not count as regulatory capital and building societies will have to issue what are known as core capital deferred shares (CCDS) instead, as Nationwide has recently done.
Existing Pibs will be excluded from regulatory capital by 2021. This means that those Pibs with call options will probably be bought back and replaced with CCDSs.
But the CCDS could spell good news for the remaining Pibs out there. Not only will they have some scarcity value, they may end up being safer investments as CCDS will be behind Pibs in the repayment queue and will suffer any losses before they do.
Should you buy?
Coventry Building Society looks to have very strong finances for those looking for one of the safest Pibs out there. The yield to call on the Skipton BS Pib looks tempting, but you will not be able to own this in an Isa as it will be called by the issuer in three years.
Four Pibs to consider buying now
| Skipton | 6.875% 2017 | On 13/4/2017 @ 100p | 93p | 7.40% | 9.40% | 11.42% |
| Yorkshire | 13.5% 2025 | Matures 1/4/2025 at 100p | 150p | 9% | 7% | 13.70% |
| Coventry | 12.13% | No | 180p | 6.74% | N/A | 22.50% |
| Leeds | 13.38% | No | 168p | 7.96% | N/A | 14.20% |
Source: fixedincomeinvestor.co.uk
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