How a 'gentleman's agreement' is backfiring for Pib investors

We're talking here of events in 2015-16 and valuations based on LIBOR in 2012. LIBOR is pretty volatile - around 5-6% in 2006-07 - which, of course, illustrates why these PIB prices will be volatile, too.

Of course, a reset date in 2013 is a serious issue.

At last a sensible article on PIBs. There is no reason for an issuer of these bonds to replace low cost borrowings with much more expensive finance. Gentlemen's agreements ought to carry no weight with investors.

In the present financial climate it is best to stick to the letter of the law. Look at the terms & then decide if it is in the issuers financial interest to repay. In most cases the bonds shoulds be considered irredeemable.

Good 'heads-up' article - should be required reading for all Pibs investors. Adds to the overall risk:

http://www.the-diy-income-investor.com/2011/09/pibs-for-high-returns-but-with-risk-uk.html

I wondered how long it would be before the penny dropped. This is why I've NOT bought a certain PIBS fund that's been mailing me for ages and why I warned on my Radio Leeds spot last Thursday week that investors should bde careful of PIBS. Yeah... I know I'm a smug git!

Overlooked is why Government allows continued marketing of financial products with misleading terms and Catch 22 clauses.

Fresh from bankers' success in mugging old ladies with misleading accounts termed "Saver" and variation thereof (which are no such thing); and accounts that drop off their interest after one year to be resurrected with equally fanciful new names, the FSA allow this sort of PIBS small print apparently encouraged and exploited by Government.

Neither is re-organising and changing the name of the FSA a proper solution. Bankers and politicians at large have yet to realise the growing anger of the populace that they are supposed to serve. More "expenses" and "investment" practitioners need to be brought to trial and jailed - even if only to encourage the others. Honest and transparent dealing to help citizens create and hold wealth is the way forward for national success, not trying to skim them off by sleight of expression and exercise of monopoly power.

PIBs need to pay off their coupon at due date and re-issue them; or extend them only on similar terms to their issue. The Regulator needs to step in and stop further issues and accounts that "drop out" after a short period. That is fair and honest dealing.

At last an informative article on PIBS instead of pensions and unit trust concealed adverising/

I fully support Steven Fieldfare and further add that in respect of terms and conditions documents, all clauses reducing nvestors' rights should be in bold, font size 12 or larger, failing which they become invalid.

"PIBs need to pay off their coupon at due date and re-issue them; or extend them only on similar terms to their issue."

Do you mean that they should always be called on their first call date - as tended to be the case in the past? If so why? If the prospectus quite clearly states that it is the first call date but if not called reverts to X then that is what the contract says (not what you want it to say). Any prospectus I have read in the past has been quite clear on this point and in the normal body size print used throughout the document.

Garth N - quite so, and "the past is no guide to ..." is inserted into everything!

The reason calling was standard was that LIBOR wasn't low enough. Now that it is low, buyers and holders can hardly complain.

I haven't bought PIBs for a long time because of their inherent uncertainty. I held some in the 1990s for the income, but sold when they'd served their purpose. I was very clear at the time that they should be thought of as having no clear redemption date, or no redemption date at all (pretty clear from their name: 'permanent' interest-bearing shares!), and not thought of like gilts, where the endgame is much clearer due to a known redemption date. PIBs are inherently riskier than gilts and always have been, although (back in the 1990s at any rate) you got compensated for this with a higher coupon. I wouldn't buy them now.

Steven Fieldfare,right on the money.

Another example of the "heads we win tails you lose" attitude of elements of the financial services industry.

On the other hand for balance it should also point out that there are some PIBs that even now offer some value , eg Prinicipality 7% , call 2020 , re set every five years if not called , currently that would be a yield of 5.4% and that is at a price of 74p , you could pick them up around 64/65 last week meaning just over 6% with five year gilt being on the floor it seems a reasonable investment in a solid society . Judge each case carefully , sure some are poor but others acceptable .

If the Banks are offered a way to get cheap money (at the expense of the investor) you don't think they they will have any scruples about taking advantage of it.

The regulators should be allowing the call date of the PIB to be extended or re-issued if they want a status quo to be maintained. Not providing a weazle like get out.

Good sensible article, I have a Nationwide PIB 6.25%, must have a good look at this. the first society to renage on it's call date will knock the bottom out of the PIB market

I really have difficulty in understanding the 'banker bashing' type of opinion being expressed here. The PIBS (and other forms of debt) are issued under a contract (the prospectus). The contract freely entered into by both parties says what it says, not what you might like it to say at some time in the future. It's a public document and easily obtained by a potential buyer. It may be long but it is in pretty clear English. The buyer may have taken a viewpoint that they will always be paid at first call. Now that viewpoint turns out to be wrong. It's really very simple: the issuer of the PIBS is entitled to use the terms of the contract to his best advantage just as you are able to do in buying or selling them in the market. That's the contract law which in the UK AFAIK has not been changed.

If one goes down the route of changing contracts post issuance then that is a very dangerous route. This route has just been taken by the Irish Finance Minister for Irish debt. What price reliance on their integrity now?

Does this article apply to Bonds, such as RSA 8.5% 2016? I bought this bond TODAY! following an article in The Right Side

Kello Rover, did you read the prospectus before you bought? Most are downloadable from the London Stock Exchange website.

I agree a useful and interesting piece but has missed a couple of points.

1. I have bought a range of bonds for my mother's portfolio because I need the income to pay care fees. If I have secured the yield I'm seeking then I care not if the mkt price fluctuates just so long as that yield is maintained and the issuer doesn't go bust whilst she's still alive. If that does happen they rank above shares; meanwhile the interest is tax-free in an ISA.

2. If a PIB is paying out 5-6% and can be refinanced at 2-3% (surely quite possible in current market) then why would the issuer not call it in?

Re the refinancing question from Mike Rutherford, although market interest rates are low, the run-on terms of many PIBs and bonds are even lower - sometimes as little as 0.5% above bank base rate. That's why the Pibs or bonds are not 'called'.

Ah-Ha! Not so 'permanent' then.

Thanks for that, Lorna.

The re-set terms vary a lot , as in the example I gave above with the Principality 7% , these re-set every five years at roughly 3% above five year gilt , so with that rate being at its lowest ever , even that means a decent return at the current price , quite un-usual to have a really low re-set rate , but they certainly do exist .