Just noticed this. It will take a little time to see if the above are highlighted in any way.


  • I presume this is something to do with the takeover of Chartered Financial Services a few days ago
  • Have just skimmed the document looking for quick clues. It is about a capital reorganisation in part to deal with the CCFS situation. There are references to some instruments no longer qualifying as capital but these do not include1SBA and 1SBB which are already above the line as debt liabilities. Part of the CCFS rationale was to gain access to lower cost funding. Hard to see 1SBA and 1SBB not being redeemed at the first opportunity. Why pay twice the current market rate? We shall see.
  • Is it possible to elabourate please as I'm not clear how OSB could replace 1SBA/B which borrowing at half the rate?

    I'm afraid I do not fully understand the rules and really would appreciate some better insight so my apologies in advance if I've got the wrong end of the stick on this one.

    I assume the view is that 1SBA/B will cease to be allowable Tier2 capital and therefore they redeem and them and replace with borrowings from savers or perhaps the wholesale market. This confuses me as 1SBA/B are subordinated debt which I undestood does count as Tier1/2 capital going forward rather than subordinated prefs or PIBS which broadly speaking does not count from 2021/2026 towards Tier 1/2 capital (I don't fully understand the transitional relief as much as I would like and also depending whether the rules are loosened due to Covid-19)

    As an observation if OSB do intend to redeem 1SBA next year it's currently mis-priced by a long way which doesn't seem likely. Also would not OSB would be scooping them up in the market now?
  • edited October 2020
    Hello JD: If you take a look at the thread "On the horizon" hopefully you will find what you need there. It will save retyping.

    As regards being allowable for capital purposes, let it be said, we may be wrong.

    However, that still leaves the cost of debt being good enough reason alone to repay these obligations.

    The interest rate for 1SBA is to be reset next March at broadly 5 years gilts plus 3.4%. Say, 3.4%. Banks are now raising 5 years funds at about half of that via various platforms.

    Charter Savings was recently acquired in order to better access lower interest rate finance. For a minimum of £5k, they are offering 1.26% for a 5 years bond. So 1.26% vs 3.4%. Why keep the higher rate debt if it can be redeemed which we think it can provided their regulators agree? We may be wrong though hopefully not.

    A recent added straw in the wind is this capital reconstruction which appears to be on part designed for further changes in the future.

    I repeat - we may be wrong but if we are right, goodee, if we are wrong we have 5 years OSB obligation paying 3.4% which isn't so bad currently.

    Finally, agree as regards the apparent mis-pricing.

    As regards not scooping them up, I don't think that is allowed as it would be tantamount to redeeming at less than par which is not allowed.
  • Thanks. I understand your thinking but we should be clear in case there any inexperience investors that Tier1/2 debt isn't comparable to a government guaranteed 5 year bond from OSB , in that Teir2 debt carries the risk of non-payment of interest and capital loss. Fro example the holders of the West Bromich and Manchester T1/T2 are sitting on 70-80% capital losses and aren't getting paid a coupon.

    Most banks have been busy the last 6 months issuing more T1/T2 capital to prop up their balance sheets to deal with Covid bad debts, so the only way OSB are going to call is if they replace it with some other form of T1/T2 which doesn't appear likely to me as it's inexpensive compared with their other T1/T2.

    With regard to scooping (I could have phrased that better) I'm not sure.
    PFG, IPF, LIV have all bought back bonds in the market below par in the last 6 months.
  • Just noticed this on the OSB website:

    Interest Rate reset on the £22,000,000 Perpetual Subordinated Bonds

    The revised rate of interest which shall be payable from and including 7 March 2021 is 3.4323%
    This rate will remain the effective rate payable on the Bonds until the next reset of interest rate, which is due to take effect on 7 March 2026.

    3.4323% it is.

  • Thanks for that dandigirl. Bit disappointed, I was hoping for a call !!
  • edited January 22
    Me, too. However, I think there is still time - up to 7/2 if my reading of the prospectus is correct. But straws and clutching come to mind. That said, the rate is as expected - margin + very little - and the yield not that bad especially for those who bought below 100.
  • Only one plus point for me - where on earth would I have put the proceeds !

    I'm fairly relaxed though at the yield over the next 5 years , asI (we I expect!) all purchased these around 90p

  • edited January 22
    Think these would need to be 4% so 85p , before I got interested. Other bank prefs seem around 7% so that allows 3% for the gilt fix option and a par bonus possibility going forward
  • Well I have a lot of 1SBB and a fair few of the 1SBA. I sold the BA ones this morning at a fraction under 88p. I didn't feel the yield was good enough with the new re rating. I expect the price of the 1SBA will fall accordingly when the re rating comes into effect.
  • We have now passed the 30 to 60 day notice period for 1SBA and the price remains unchanged, so far.

    I had wondered whether they were gradually purchasing any of the 2 issues themselves, which might make sense perhaps, but as they are supposed to give one month's notice to the FSA I think someone would have spotted that by now (bondholders only advised if it is done by tender and also given chance to bid themselves)

  • I'm confused as to why OSB would want to buy back these bonds especially 1SBA.

    As we know the FCA is encouraging the banks/insureres to buy back some of the "2007/8 legacy T1" equity capital and has granted grandfathering rights to this class of equity so that it gradually becomes useless as T1 capital. Certainly with the PIBS this is being converted to T2 capital if not called. Specifically I understand this to mean equity capital, i.e. some of the prefs and PIBS. This will be replaced with bonds for banks and CCDS for building socities.

    The first bit that's puzzling me is that 1SBA and 1SBB aren't equity capital (PIBS and prefs) but bonds and further they are already subordinated T2 capital, so on that basis they aren't being grandfathered. The second and possibly more important bit that's puzzling me is that an interest rate of 3.4% for T2 capital is really cheap. If they had to re-issue it they would be paying far more than 3.4% (which I assume is why it is trading significantly below par.

    I'm afraid my thoughts above are the limit of my expertise and my apologies in advance if they are completely wrong.
  • JD: Why pay 3.43% for 5 years funds when it could probably be raised for less than 1%?

    Cambridge and Counties are offering 0.95% on the Raisin platform for 5 years fixed. IMV OSB is a better name than CCB but it's the FCCS guarantee that people look at. It's only £22m but that would be over half a million p.a. straight to the bottom line.

    Can't think that OSB's Treasury people would miss this. My guess - that it has come too soon after all the other capital shenanigans at OSB and the regulator said not now.

    What other explanation can there be for forgoing 0.5m to the P&L?
  • Dandigirl - I think you are proposing that OSB do not need the T2 capital, but I do not see an evidence base for this. Indeed further if OSB do not need the T1/T2 capital they are going to shed the capital on which they pay the most interest first, not the least.

    I agree sure, they could get the money from savers at a cheaper rate but then it wouldn't be T1/T2 capital, which is reserves the bank is required to hold for regulatory reasons, i.e. the whole point of T1/T2 capital

    Also from what I've read over the last 6 months the regulator has been seeking to persuade banks to add to their T1/T2 capital in regard to risks of a downturn, not reduce it. Thus, the suspension of dividends for a while. I am unsure if the regulator now sees this capital build as complete or not.

    Thus, my enquiry really. I think I understand now. I think you feel the T2 capital is not needed whilst I feel it is. My apologies if I've misunderstood.

    Setting aside whatever the regulator and the market thinks, my personal view is the outlook for banks looks pretty scary to me. They are sitting on a whole load of personal and commercial debt (OSB has loads of commercial debt) and any weakness in property/real estate prices could become a problem which would require the banks to further enhance their T1/T2 capital.

    Having said all that I own quite a few 1SBB and I'm happy enough with it. It provides a decent if not exciting income stream.
  • As far as PIBs are concerned, I think (underlined, bold, in italics, red etc etc) the situation is

    1) They are additional tier 1 until 31 Dec 2021 (i.e grandfathered until then). They then count as T2 capital

    2) Some societies may have been transitioning them from AT1 to T2 over the recent past years, for reasons I don't know, or haven't delved into

    I also picked this out from one society - Under regulatory rules for Individual Capital Guidance, at least 56% of capital must be CET1, no more than 44% should be AT1 and no more than 25% Tier 2 capital

    So, as far as building societies are concerned, their PIBs can/will continue to be counted within the above proviso

    Now - are PSBs (that replaced PIBs when societies were de-mutualised) treated in the same way ??
  • JD: I suspect you are right. It is the only explanation I can think of for not redeeming. I did do some digging and saw the PSBs as T2 at the end of 2019. The Pillar 3 document p33. I looked for end 2020 and, of course, it is a bit too early.

    Their regulator will have been consulted on the capital reconstruction of late last year. OSB would have had to do some considerable stress testing methinks. As I mentioned, I suspect that this opportunity came a bit too soon for OSB on top of these recent changes. I confess I have not looked at all that documentation as I was in by then anyway.

    Like many, I suspect, our purchases were in the 80s so the yield is in the region of 4% which is much better than OSB would pay for 5 years funds. Like you, we are content with that. Needs watching though if rates start to rise.

    As to the banking big picture, Barclays and NatWest this week. Lloyds and HSBC next. Nice rises today in the expectation of better things to come. :smile:

  • For info.
    OSB have the following additional AT1/T2 capital

    £60m perptual AT1's paying 9.125% convertible to equity if CET falls below 7%. Reset in May 2022 at gilts+8.36%
    £22m T2 1SBA paying 3.4% reset in Mar 2026
    £15m T2 1SBB paying 4.6% reset in Sept 2024
    £10m T2 paying 7.45% reset in Sept 2024

    The interest rates are not directly comparable as they all have different features. It would be my view that should OSB have the opportunity to scale down it's regulatory capital it's the AT1's and the £10m T2 it would wish to deal with first.

    Finally, as an expanding bank unless it's making huge bundles of profits it's going to need more regulatory capital as it grows so probably for this reason more than any other I think the status quo will remain.

    With regard to your point Wozzitworthit on PSB's being treated the same way as PIBs I'm not entirely sure but I do know that some subordinated building society debt has been grandfathered. However, in general as most of it from what I can see has 5 year reset dates or had maturity within a short space of time it was grandfathered away much quicker than PIBs which had a far greater time period to maturity. Either way 1SBA & 1SBB are now both T2 regardless of it's historical status.
  • Hmmm - decided to push the sell button today and relieved to sell out @ 87.45P. 5 years at the new rate just too long for me.

    I only purchased in October so quite happy with the received annual equivalent yield of 8.5%.
  • Thanks for the postings on £15m T2 1SBB paying 4.6% reset in Sept 2024, as this continues to be an important holding for the family
    I like the coupon resetting every 5 years, so if Interest rates climb, which I expect they will by 2024, there is some future protection
    Past Interest Rates
    01/02/2011 = 7.875%
    27/8/2014 = 5.988%
    27/8/2019 = 4.6007%
    Coupon Prevailing 5 year gilt yield +400bp
    For an issue size of £15m I can't them calling (so small), but then I might be wrong!

  • JammyDodger said : "Finally, as an expanding bank unless it's making huge bundles of profits it's going to need more regulatory capital as it grows so probably for this reason more than any other I think the status quo will remain."

    Good point and I would end to agree with that
  • Jammy, unaware of the convertable bond paying 9.125%. .Is it something us PI can get into ? Struggling to find anything about it on Equiniti or this board.
  • edited February 17
    Hi Colin, It is 200k minimum size and beyond that I know very little. I can't even get a price just to see what's it's trading at as that seems to require a subscription service.

    So, not for us PI's or rather I suspect if you have High Net Worth/Sophisticated Investor status and a decent broker you can buy it. Beyond my wealth, knowledge and skillset I'm afraid.
  • Thanks for that Jammy, ... 200K min. wow, like you beyond my wealth and I don't think I'd like to throw this much in, on one line. I'll wait and see where 1SBA sits after the reset next month !
  • edited February 21
    Whilst waiting for delivery of our Sainsburys order, thought I would look at the capital reorganisation of last month.

    Seems that one of the main reasons for the reduction is that capital is "significantly in excess of regulatory requirements". The other is to do with the upstreaming of dividends from subs and the creation of distributable reserves for the payment of divis. More than enough available capital it would seem.

    In any event, £22m in nearly £1.5bn doesn't seem significant.

    Then thought I would take at look at the last interims to find the following as Note 1 to the Financial Statements..

    ""For the year ended 31 December 2019 the Group identified that a clause in the terms of the Group’s
    £22.0m Perpetual Subordinated Bonds (‘PSB’) relating to the Board’s discretion over the payment of
    coupons was conditional and hence the PSBs were incorrectly classified as equity. The Group has
    restated the 2019 interim comparatives accordingly to classify the £22.0m PSBs as a financial liability""".

    Do we conclude that these PSPs are no longer T1/T2 equity? It would appear so?

    ... and, if so, maybe OSB had another reason [moral?] for not redeeming them.

  • I found the Pillar3 document related to the Dec 2019 results incredibly helpful and is well worth a read.

    It states 1SBA and 1SBB are T2 capital.
  • Hello JD. Yes, I did take a look at the 12/19 Pillar 3 document but, of course, the 2020 interims supersede that. Moreover, the recent recapitalisation will supersede not only 2020 interims but also the forthcoming 2020 finals.

    I had intended to take another looksee when full year 2020 docs are available.

    That said, I would hope that the PRA will not be satisfied with a revised Pillar 3 based just on 2020 year end but also ask for a later version - end of Q1/2021? - based on the recap. of last month.

    As matters stand, it appears that OSB has oodles of capital and these PSBs are not deemed to be T1/T2.

    I admit I am just perplexed [irritated?] as to why the £22m were not redeemed. Capital is not an issue and there were sound commercial reasons for doing so.

    Maybe it was for reputational reasons? Fear of some bad publicity? Perpetual was taken to mean just that.

    Any OSB shareholders here? Maybe a question could be asked at that next AGM?

  • Hello JD: I have taken another look at that Pillar 3 document. Page 33 clearly indicates that the PSBs are indeed T2 capital. The change of status to financial liability did not change the capital standing. You are right. Apologies and thank you + happy to be educated. :smile:

    However, notwithstanding, given the smallness of the amount in the context of total capital, am still perplexed as to why the opportunity to save £0.5m a year wasn't taken.

    As matters stand, content to receive just less than 4% p.a. with the ability to sell at any time.
  • I hope I am not talking too soon, but I am pleasantly surprised not to see the price of 1SBA plummet after the reset. I was tempted to cut and run before the interest payment, but glad now I didn't.
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