West Bromwich Building Society makes debt deal

The West Bromwich Building Society, which was reportedly on the verge of an arranged takeover, said Friday it has reached an innovative agreement with creditors to boost its capital ratios and keep it independent.

Using a new financial instrument sanctioned by regulators, West Bromwich said holders of its subordinated debt totaling 182.5 million pounds agreed to convert their assets to profit-participating deferred shares.

The bank said this would strengthen its tier 1 capital ratio, a key measure of banks' viability, from 6.8 percent to 11.6 percent. Holders of the new shares will be eligible for dividends of as much as 25 percent of future consolidated post-tax profits.

The Financial Services Authority said the new type of share was devised in cooperation with the Treasury to allow the building society to better deal with losses. Investors in these shares are not covered by government guarantees on ordinary deposits.

"Prior to this the only source of core tier 1 available to building societies under the FSA's rules was reserves grown from internally generated profits," the regulator said. "Now building societies, like banks, have the option of raising core tier 1 capital from external sources."

The British Broadcasting Corp. had reported on Thursday that the Financial Services Authority was working to arrange a takeover of West Bromwich, as it had done in March when the Nationwide Building Society took over key assets of Scotland's Dunfermline Building Society.

"The exchange of the society's tier 2 sub-debt into core tier 1 capital materially strengthens our capital position and, under stress-test scenarios, has demonstrated our ability to withstand a further significant deterioration in market conditions," said the society's chief executive, Robert Sharpe.

The announcement came as the mutual society reported a loss of 39.3 million pounds ($64.9 million) for the year ending March 31, compared to a profit of 33.1 million pounds a year earlier. The company took charges of 88.3 million pounds on bad loans, losses on investments and provisions for liabilities.

West Bromwich said three-fourths of its risk provisions related to commercial loans, which it is no longer providing. It said arrears figures on prime residential and buy-to-let mortgages were lower than industry averages, but gave no figures.

The 160-year-old West Bromwich Building Society employs 850 people in 46 branches in west-central England.

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On the Net: http://www.westbrom.co.uk