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Analysis & Comment:  

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The subordinated bank sector is recovering strongly at present. Investors are showing a greatly increased appetite for risk in 2012, as evidenced in the equity markets with the swing into midcaps, small caps and growth stocks.

In the bond markets, the subordinated financial sector occupies the same psychological pigeon hole as growth stocks, namely the heady mixture of higher risk and commensurate reward. Displaying commonality with the small caps, subordinated bonds have rallied sharply since the lows of Q4 last year.

I have looked at a couple of issues in the sector over the last month or so, including the Principality 7% PIBS and the Lloyds 9.25% preference shares. This week I thought I would take a look at the Co-operative bank 13% Perpetual Subordinated bond, an issue that came into being as an exchange offer for the old Britannia Building Society PIBS, following the Co-op’s takeover of the building society in 2009 .

The details of this issue are below:

  • Issuer- The Co-operative Bank
  • Collateral type - subordinated 
  • Coupon 13% s/a (cummulative)
  • Maturity - undated, non-callable
  • Rating - Moody’s Baa3
  • Size of issue - £110 million
  • Minimum piece - £1,000
  • Code: GB00B3VH4201 / CPBC
  • Market price - 141
  • Running yield - 9.2%

Perhaps the stand-out feature on this bond is its simplicity. Unlike many instruments in the subordinated space, the bond has no complex calls or coupon re-sets to add uncertainty.

Whilst the subordinated ranking of this bond adds risk, the mutual status of the issuer, and its stated ethical agenda is definitely a plus point. Hopefully such an approach will help steer the bank away from some of the more excessive behaviour seen from the competition. What is more, the bond is perpetual and non-callable, both factors that will aid price performance, should sentiment increase further.

A copy of the prospectus for this issue, which is available by clicking here.

My view: With a running yield of just over 9%, I view the Co-op 13% perpetual as a buy (with the usual caveats on diversification). Investors should consider the tax situation on this income-generating instrument. The bond pays gross, but investors will need to utilise an ISA or SIPP in order to fully benefit from the income generated. 

Mark Glowrey

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