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Bond of the Week: 17 April 2012

We revisit the Yorkshire Building Society 13.5% 2025 bond........


I have received a couple of emails from readers over the last few weeks asking for an update on the Yorkshire Building Society 13.5% 2025. I featured this security as my Bond of the Week in September 2010. At the time, this security had just emerged from the shotgun wedding of the Yorkshire and Chelsea building societies, the latter having been forced into the arms of its stronger northern competitor during a bailout process.

Holders of Chelsea PIBS took much of the pain of this bailout, and PIBS and subordinated debt holders should remember that, with no equity capital to dilute, such instruments are typically the first line of defence for building societies. Holders of Chelsea subordinated debt took a 50% "haircut" on this transition, and ended up with a half-sized holding in the new bond - the YBS 13.5% 20205. The details of this security are as follows:

  • Issuer: Yorkshire Building Society
  • Issued: April 2010
  • Collateral type: subordinated
  • Coupon: 13.5% (semi-annual)
  • Maturity: 1st April 2025
  • Issue size: £100 million
  • Min piece: £500
  • ISIN Code: XS0498549194
  • Features: Conversion trigger if issuer’s Tier 1 ratio falls below 5%
  • Credit rating: BB+ ( Fitch)
  • Callable: no 

Back in September 2010, the security was trading at 115. That worked out at yield to maturity of 11.4%. At that level, I considered the bond to be a buy and added a position to the Model Portfolio.

Since that point in time I have not greatly changed my view. Results were out for the Yorkshire in March (link here) and the society has recorded a healthy profit, up 27% to £163 million with the important "core tier one" ratio of assets to capital up 0.2% to 12.6%.

In the market, the chart shows a slightly volatile range trading behaviour (see chart), which is broadly in line with the "risk on" and "risk off" swings seen in the subordinated bank debt market.

My view: The bond is trading at 125 (offer side) in the market, and that places the YTM at 10%. That is fair value, and I would view the security as a "hold". However, I would stress the point that this bond is a contingent convertible, an intrinsically higher-risk instrument than a conventional senior bond. If the society’s tier one capital falls below 5%, the bond holders will suffer a forced conversion to the much less desirable "PPDS" profit participating deferred shares.

Potential investors should consider that such instruments should be held as part of diversified portfiolio. Diversification is particularly important for subordinated or hybrid instruments, where the risk of default or other credit-driven events is higher than a conventional bond, and liquidity may be variable.

Mark Glowrey

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