Holders of permanent interest bearing shares, including pensioners and retail investors, are facing losses under rescue plans to plug a capital shortfall of up to £1.8bn at The Co-operative Bank.
The Co-op is considering a rescue plan which would involve cutting the income paid to junior debtholders. It could also see interest on Pibs cancelled altogether under a debt to equity conversion similar to that first carried out by the West Bromwich Building Society in 2009.
Under the proposals those holding Pibs would be hit with losses on £310m of Pibs and a further £60m of preference shares.
Pibs are shares issued by building societies which pay a fixed rate of interest. Britannia Building Society issued the Pibs before it was taken over by the Co-op in 2009.
Of the £370m held as junior debt, some £30m is held by the public. The shares pay annual interest of between 5.55 per cent and 13 per cent. The proposed cuts are expected to cost investors about £3m a year.
Ratings agency Moody’s drastically cut the Co-op’s credit rating last month. The bank has already sought to plug its capital shortfall through the £219m sale of its life insurance and asset management arms to Royal London, and by stopping lending to new business customers.
The Building Societies Association says Pibs have always carried the risk that interest could be cut or suspended.
The Co-op declined to comment.
Aurora Financial Planning chartered financial planner Aj Somal says: “If pensioners and investors end up paying for the woes of the Co-op, they are likely to take their money elsewhere. These plans should be a last resort as Co-op risks alienating its core customer base.”