Talks on debt deal to rescue lender

Jun 12 2009 by Iain Laing, The Journal

WEST Bromwich Building Society has confirmed it is in talks over a debt deal that would boost its capital strength.

The mutual said the discussions, being held with groups holding some £182.5m of debt, were at an advanced stage and could lead to a deal that would “materially strengthen” its capital.

The UK’s eighth largest building society has been at the centre of mounting speculation over an imminent rescue as concerns have grown over its health.

The deal being worked on is believed to be a debt-for-equity swap by financial institutions which have lent the bank money.

West Bromwich said it would make a further announcement in the near future after speculation the Treasury is looking at a number of options for the society. It may be broken up, with its savers transferred to another building society and its assets taken over by the Bank of England under the so-called Special Resolution Regime, as the Dunfermline Building Society was taken over by the Nationwide last March after working up losses of £26m.

The Nationwide also rescued the Cheshire and the Derbyshire building societies.

Or the Financial Services Authority and the Treasury may convert some of the debt provided by investors and financial institutions to the West Bromwich into a new form of capital, allowing it to keep its independence or to merge with another society.

The 160-year-old business has almost 600,000 members and employs 800 staff, with nearly 50 branches in the UK.

It is thought the Financial Services Authority (FSA) has been stress-testing the West Midlands mutual, with reports suggesting auditors were yet to sign off its accounts amid fears it is close to breaching regulatory capital requirements. But the West Bromwich has denied speculation it is in sale talks and last month sought to give assurances over its “long-term future as an independent business.

The society’s full-year figures, due on Monday, are expected to reveal big losses for the year to March 31 because of its exposure to risk-laden buy-to-let lending.

Concerns have been mounting over building societies and higher risk lending, such as buy-to-let, self-certification and commercial mortgages, as well as loans made to people with adverse credit histories.

Rating agencies have recently downgraded a number of players in the sector – with West Bromwich among those seeing their ratings slashed.

The FSA said earlier this month it was launching a crackdown on societies branching into riskier business without the proper controls in place.

The long-term outlook for the West Bromwich was downgraded from an A- to a BBB+.

But a spokesman for the society said it remained “a safe and secure home for members’ savings”.