Financial innovation comes to West Bromwich

June 11, 2009

OK, don’t log off just yet. It’s more interesting that it may initially sound.

The UK regulators and the credit rating agencies have become increasingly concerned about the financial health of the mutually-owned building society sector. One big regional society, the Dunfermline, has already collapsed and Britain’s biggest society, the Nationwide, has rescued a couple more. In April, Moody’s downgraded a whole load of them. And now yet another one, the West Bromwich, is looking a little wobbly.

One of the problems that societies face is that when they get into trouble, there’s no way of raising fresh capital. It’s sale or curtains. And now the Nationwide, thus far pretty much the buyer of last resort, has indicated it doesn’t want to buy any more.

Enter the FSA, which has been wracking its brains trying to come up with an instrument that will allow a mutually-owned entity to raise equity or near equity capital. This is no mean feat given the constitution of most mutuals. However, the word is that those eggheads at the FSA have now cracked the problem and will unveil their gleaming new security as part of a recap plan for the West Brom.

It will certainly be interesting to see how it works, given the need to put permanent capital into an institution controlled by its customers. What sort of say in the society will these new investors have? There’s talk that existing subordinated debt holders will be invited to swap their existing holdings for the new instrument. It may be possible for the FSA to twist their arms because the alternative is pretty nasty. But presumably there will be a need for new money to be put into the West Brom too, and it will be fascinating to see if this new security will be sufficiently appealing to lure in some new investors.

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