Manchester Building Society

[Jwdool]

The Manchester Building Society and the Newcastle Building Society have agreed terms. PIBS to become part of Newcastle. Currently trading ~7%, but there will be additional CET1 build up, given the PPDS/ excess capital available in MBS. See: MBS RNS and announcement on their website 21st Feb 2023

[88V8]

See: MBS RNS and announcement on their website 21st Feb 2023

This would be good news, but whatever is on the MBS website is well hidden....

However, there is this from the Newcastle
The Boards of Newcastle Building Society (‘Newcastle’) and Manchester Building Society (‘Manchester’) have agreed heads of terms to merge by way of a transfer of Manchester’s engagements to Newcastle.
Manchester Permanent Interest Bearing Shares (‘PIBS’) will become PIBS with Newcastle on the merger taking effect with their existing terms and conditions, but subject to Newcastle’s Rules. If the merger does not proceed as planned, the heads of terms contain provisions which, depending on the circumstances, may require one of the Societies to pay the other's external costs of up to £1 million.

Effective 1st July assuming agreement by the PRA.

V8

[Padders72]

There was an RNS this morning so it wasn't all that well hidden!

https://www.investegate.co.uk/mancheste ... oc%20Alert

[hiriskpaul]

They took their time, but got their in the end. Excellent news!

[Jwdool]

One aspect of the Manchester Building Society PIBS, which the market is currently under pricing is the likelihood of the notes being called in 2030, see Clause 4(4) of the 6.75% series conditions, which can be found on the Building Society website.

Under the CRD iv / Basel III rules, PIBS no longer count towards Tier 1 capital in the building society world. This has been the case since they were grandfathered from 2011-2021. This means the PIBS count as Tier 2 under CRR Article 486.

Since Basel III, building societies have been issuing a variety of equity-like paper, known as CCDS or PPDS which in essence protects the old legacy PIBS, making them safter to hold. This is the case as the "buffer" impact of a decline in profitability will affect the Tier 1 instruments before impacting on the Tier 2 notes.

In practical terms, this means the PIBS ought to be priced in the same way as other Tier 2 instruments, rather than Tier 1. If those notes have a call, then they will increasingly look like Senior bonds as we approach the call date. It would be odd if any of the PIBS with a call were not called at the first opportunity, on the basis they don't really assist the society in meeting their CET1 reg cap requirements and operate as a significant cost, without performing a meaningful role.

Once the Manchester B/S merges with the Newcastle, I would expect to see this paper either tendered earlier, almost certainly at a premium to par in order to reduce an unnecessary cost. If this doesn't happen then they will inevitably be called in 2030 with a high return of 6.75% for Tier 2 with little risk, as the Newcastle will be required to hold a compliant CET1 buffer in front.

themanchester.co.uk/downloads/main/2005-oc-final.pdf

[hiriskpaul]

One aspect of the Manchester Building Society PIBS, which the market is currently under pricing is the likelihood of the notes being called in 2030, see Clause 4(4) of the 6.75% series conditions, which can be found on the Building Society website.

Under the CRD iv / Basel III rules, PIBS no longer count towards Tier 1 capital in the building society world. This has been the case since they were grandfathered from 2011-2021. This means the PIBS count as Tier 2 under CRR Article 486.

Since Basel III, building societies have been issuing a variety of equity-like paper, known as CCDS or PPDS which in essence protects the old legacy PIBS, making them safter to hold. This is the case as the "buffer" impact of a decline in profitability will affect the Tier 1 instruments before impacting on the Tier 2 notes.

In practical terms, this means the PIBS ought to be priced in the same way as other Tier 2 instruments, rather than Tier 1. If those notes have a call, then they will increasingly look like Senior bonds as we approach the call date. It would be odd if any of the PIBS with a call were not called at the first opportunity, on the basis they don't really assist the society in meeting their CET1 reg cap requirements and operate as a significant cost, without performing a meaningful role.

Once the Manchester B/S merges with the Newcastle, I would expect to see this paper either tendered earlier, almost certainly at a premium to par in order to reduce an unnecessary cost. If this doesn't happen then they will inevitably be called in 2030 with a high return of 6.75% for Tier 2 with little risk, as the Newcastle will be required to hold a compliant CET1 buffer in front.

themanchester.co.uk/downloads/main/2005-oc-final.pdf

Newcastle may want to tender for their PIBS, as other building societies might, but I dont see them being in a rush to. It does seem likely that the 6.75% PIBS will be called though as will other BS PIBS that are callable. In addition to the Manchester PIBS, Newcastle have issued £20m (I hold the 12.625% PIBS), all now Tier 2. Newcastle have never issued any new style CET1 paper and don't really need to as they have substantial reserves, but they will of course inherit the Manchester PPDS. Whether tendered or not, PIBS will become increasingly rare and as you say, safer now they are sitting above all that CET1. At current prices I am very happy to hold, but might reduce my Newcastle/Manchester positions as I have far more exposure to them than all my other PIBS put together.

[GoSeigen]

One aspect of the Manchester Building Society PIBS, which the market is currently under pricing is the likelihood of the notes being called in 2030, see Clause 4(4) of the 6.75% series conditions, which can be found on the Building Society website.

Under the CRD iv / Basel III rules, PIBS no longer count towards Tier 1 capital in the building society world. This has been the case since they were grandfathered from 2011-2021. This means the PIBS count as Tier 2 under CRR Article 486.

Since Basel III, building societies have been issuing a variety of equity-like paper, known as CCDS or PPDS which in essence protects the old legacy PIBS, making them safter to hold. This is the case as the "buffer" impact of a decline in profitability will affect the Tier 1 instruments before impacting on the Tier 2 notes.

In practical terms, this means the PIBS ought to be priced in the same way as other Tier 2 instruments, rather than Tier 1. If those notes have a call, then they will increasingly look like Senior bonds as we approach the call date. It would be odd if any of the PIBS with a call were not called at the first opportunity, on the basis they don't really assist the society in meeting their CET1 reg cap requirements and operate as a significant cost, without performing a meaningful role.

Once the Manchester B/S merges with the Newcastle, I would expect to see this paper either tendered earlier, almost certainly at a premium to par in order to reduce an unnecessary cost. If this doesn't happen then they will inevitably be called in 2030 with a high return of 6.75% for Tier 2 with little risk, as the Newcastle will be required to hold a compliant CET1 buffer in front.

themanchester.co.uk/downloads/main/2005-oc-final.pdf

It should be emphasised that a call if it becomes priced in to the 6.75% PIBS (MBSP) would limit the upside of their price because the call would be at par, in contrast to the 8% PIBS (MBSR) which, in addition to carrying a higher coupon, also do not carry any right to call the shares. The 8% PIBS also have much stricter terms on their interest payments which, together with the foregoing, make them rather more attractive than the 6.75% PIBS for any potential purchaser. This is especially true given the current approx 30bp higher running yield on MBSR relative to MBSP.

GS

[Jwdool]

I think both of these comments are sensible. The ability of the society to call will limit the price movement over par but I do think it is virtually certain to be called. The price dynamics of a virtually certain call also keep the price anchored to par limiting downside movement. On the Tier 1/CET1 point - most of the building societies are now hugely overfunded from a regs perspective (whether in retained earnings/ cash/ PPDS/ CCDS). I think this supports the idea that at some point they will all want to take out their legacy PIBS - and will probably have to pay up for that right (per NATW/N).

In terms of specific pricing, I'd suggest the MBSP is a buy at 95p and a sell at 110p.

[hiriskpaul]

A bit academic now, but the end of year results have been announced:

https://www.investegate.co.uk/mancheste ... 00104179R/

[Padders72]

The merger seems to be proceeding smoothly, nothing exciting here. Needs PRA approval. Will be interesting to see if there are any calls or tenders.

https://www.investegate.co.uk/mancheste ... oc%20Alert

[yieldhog]

I think the time has come for me to sell my remaining holding in MBSP. I bought them several years ago and averaged in at a price around 22, so good total return if I can sell around 96. They are in my SIPP so no CGT. At 96 I would be selling at 7.03% yield and there are currently plenty of alternative investments yielding over 7%.
This fits with my current strategy of reducing single name investments in favour of non-leveraged funds with multiple underlying holdings.
I recognise that I will be leaving a bit of potential profit on the table but hopefully I can find a new home for the proceeds that will provide a bit more growth potential as well as a decent yield.
Suggestions for a replacement welcome.

Y

[88V8]

This fits with my current strategy of reducing single name investments in favour of non-leveraged funds with multiple underlying holdings.Suggestions for a replacement welcome.

M&G and LGEN are single-name but of course with diverse holdings and yielding well over 7%.

NCYF New City currently yielding c9% at a small discount, with 10% gearing.
Other funds with fixed interest content - AXI (winding up and with an erratic SP) BIPS Invesco Bond, SHRS Shires, may be of interest as they have fallen of late.
MCT Middlefield Canadian has growth potential but at the expense of a lowish yield.

I hold all the above.

V8

[Jwdool]

As you know, Manchester is about to be merged into the Newcastle. Holders would be well advised to wait until the end of 2023 before selling, given the strong possibility of a tender in the 6.75% notes. There is a call in 2030, however, the notes have now been fully grandfathered, so they no longer count towards CET1 regulatory capital under CRDiv and CRDv.

What does this mean in practical terms? Well in effect, all the building societies that have issued PIBS (including Manchester/ Newcastle) will be paying out significant amounts of money to maintain perpetual non-reg cap which isn't helping secure members, but does deplete their profits - leading to less attractive terms for depositors and mortgage holders. The societies are still going to have to maintain minimum capital requirements - and most of them are holding healthy levels of CET1 - some in the form of cash, others in the form of PPDS/ CCDS. As we see regulatory requirements tighten (in the wake of SVB/ First Republic/ Credit Suisse), it is likely the non-reg cap notes will find themselves safer as investments - given the protections that will be offered by the paper in front.

Societies, therefore, have a vested interest in getting rid of the old legacy, pre-grandfathered paper as soon as is practically possible - which is likely to mean tenders and calls. Given the merger, I would therefore suggest that a newly merged society will seek to reduce non-reg cap and increase profitability - with the 6.75s a prime candidate for a tender - given holders will be aware of the call. I'd suggest a fair price (given prevailing market conditions) is currently around 110p if the society is going to soak up most of the issue.

In terms of alternatives, I'd suggest SKIP, CVBP, LBS (all >7%, all with great CET1) and WBS (for a bit of a punt). You might also take a look at GACA, NTEA, ELLA, LLPC, RSAB. None of which have the sort of capital build present in the B/Socs, but still paying out ~7%s.

[hiriskpaul]

I picked up a few more of the 6.75% PIBS yesterday at 94.494, YTC 7.8%, running yield 7.1%. I mostly hold the 8% (and some Newcastle 12.625%) and the 6.75% are the lowest yielding, but I am attracted by the call feature.

[Jwdool]

I trying to buy more there as well.

[yieldhog]

88V8 and JWdool,

Thank you for your responses to my original post and apologies for my very tardy reply. I prepared a very detailed reply with comments on each of the names you mentioned but unfortunately when I went to submit this I somehow lost the reply and couldn't retrieve it. It's a pity draught replies are not automatically saved on TLF as they would be when writing a draught in Microsoft Outlook. For brevity I'll just summarise my lost reply.

After spending more time drafting a new reply I've just done the same thing and lost it again. So Ill just say thank you again for your responses and I'll try not to make the same mistake again.

I have recently added FSFL (Forsight Solar Fund) to my SIPP which may not be the ideal fits with my current strategy but I've left room to average-in at a later date.

Y

[88V8]

88V8 and JWdool,After spending more time drafting a new reply I've just done the same thing and lost it again.

How irritating.
To avoid that eventuality I always copy my posts at intervals while composing, and before submitting.
Just highlight by going to the end then Ctrl/Shift and then Ctrl/C.
If it vanishes press Ctrl/V and it will reappear, provided you haven't copied anything else in the meantime.

V8

[Jwdool]

Now being distributed to members:

Portland Street - Notice For Building Societies Act
MANCHESTER BUILDING SOCIETY & NEWCASTLE BUILDING SOCIETY
BUILDING SOCIETIES ACT 1986 (ACT)
NOTICE UNDER PARAGRAPH 8 OF SCHEDULE 16 TO THE ACT
Notice is hereby given that Manchester Building Society, Register No. 206048 (Manchester), whose principal office is at 125 Portland Street, Manchester, M1 40D, desires to transfer its engagements to Newcastle Building Society, Register No. 156058 (Newcastle), and that each society has applied to the Prudential Regulation Authority (PRA) to confirm the transfer.

Notice is hereby given that Newcastle, whose principal office is at 1 Cobalt Park Way, Wallsend NE28 9EJ, desires to accept a transfer of the engagements of Manchester, and that each society has applied to the PRA to confirm the transfer.

Any interested party may make written representations to the PRA and/or give notice of intention to make oral representations to the PRA with respect to the application.

Written representations or notices of intention to make oral representations at a hearing should be received by the Prudential Regulation Authority, Small Building Societies Team, Floor 3 SE, 20 Moorgate, London EC2R 6DA, marked “Manchester/Newcastle Merger” or by e-mail to prudential_ManchesterBuildingSociety@ba ... land.co.uk on or before 12 May 2023.

If notice is given of oral representations these will be heard by the PRA on 23 May 2023, at a time and place to be determined by the PRA.

[Jwdool]

Manchester and Newcastle Building Society merger approved by PRA. See this link for details.

bankofengland.co.uk/-/media/boe/files/prudential-regulation/authorisations/which-firms-does-the-pra-regulate/manchester-building-society-newcastle-building-society.pdf

[Jwdool]

And the RNS, from 1st July:

07th June 2023
PRA confirms merger of Newcastle Building Society and Manchester Building Society
The Prudential Regulation Authority ('PRA') has today announced their confirmation of the merger of Newcastle Building Society ('Newcastle') with Manchester Building Society ('Manchester'). The confirmation follows announcement by the Boards of both societies in March 2023 that they had entered into a legally-binding agreement to merge by way of a transfer of Manchester's engagements to Newcastle. The merger was conducted in accordance with the process set out in the Building Societies Act 1986 and will become effective on 1st July 2023.

Manchester's Chief Executive Officer, Paul Lynch stated:
"Following rigorous due diligence, a formal process, and the confirmation of the merger from the PRA, we are delighted that Manchester Building Society members and our Manchester colleagues can look forward with certainty and optimism to the opportunities presented as part of a larger, financially robust Society."

Andrew Haigh, Chief Executive Officer at Newcastle said:
"This merger is important in maintaining a strong building society sector in the UK and provides clear benefits to both societies. Newcastle Building Society is a purpose-powered, growing organisation with an ambitious strategy for the future.
"The Newcastle Board, executive team and colleagues across the business look forward to welcoming the members of Manchester as full members of Newcastle. We also look forward to welcoming our new Manchester colleagues as we work together towards our continued growth and success, listening to our members, and driving the value that our members want to see."