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Debt swap lifeline for West Brom

West Bromwich Building Society escaped disaster last week after a last-minute debt recovery programme.

Working with new rules created by the Treasury and the FSA, West Bromwich swapped £182.5m of subordinated debt for profit-participating deferred shares, in effect, meaning the holders of the new shares will own 25 per cent of the society. This raised its tier-1 capital ratios and allowed the society to continue trading safely, according to FSA rules.

If the society were to collapse, society members would be higher in the list of creditors than holders of the PPDS shares.

West Brom chief executive Robert Sharpe says: “We have carefully managed and refocused our business, driving through a programme of cost reduction to improve dramatically the efficiency of the society.”

The society released its 2008 results on Friday, revealing a loss of £48.8m following a £47.8m profit in 2007. It set aside £65.2m for potential bad debts as well as a £10.9m writedown of property portfolios and a Financial Services Compensation Scheme charge of £12.2m.

But West Brom saw an 18 per cent increase in retail balances, taking its total retail balances to from £5.5bn to £6.5bn and it cut its wholesale funding ratio from 32 to 19 per cent. It says its residential mortgages are now fully funded by retail savings.

Sharpe says: “Despite the loss, we have a strong capital position. Combined with our strategic refocusing, this means we are well positioned for the future.”

The West Brom rescue also saved its broker franchise subsidiary Mortgageforce. Managing director Kevin Duffy says the capital restructure will give the brokerage the backing it needs to build the business.

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