Newcastle8%pibs Discussion Threads

[ukneonboy] 02/7/2021 20:10

Manchester Building Society has won a claim in the Supreme Court that it lost £32 million because of negligent advice from one of the UK’s biggest accountancy firms — a result that could make it easier to sue professional advisers.

Overturning a previous judgment and an appeal, seven senior judges ruled that Grant Thornton had incorrectly told the building society, founded in 1922, that it could use “hedge accounting” to deal with volatility in swap payments on the mutual’s books.

As a result of that advice, first given in 2006, senior executives at the mutual began to engage in long-term interest rate swaps as a hedge against the cost of borrowing to fund its lifetime mortgages business.

[dekle] 21/6/2021 17:34

I have also sold today, rather not wait for an outcome just glad to show a profit after holding original for 6 years and lately buying more at 21p to average down and make a bit.

[jollygreengiant2] 21/6/2021 17:30

It (about £13m) is just about enough to repair the Tier 1 capital buffer requirement but MBS say they will assess honoring 1999 and 2005 PIBS coupon "nearer the time". I suspect the PPDS investors will be offered a haircut and the PIBS get a tender too. I sold my 10,000 units for a modest profit after the 60% rise since Friday. Just glad to not be spending so much time fretting about what I knew was a stupid long shot at the time (2016). Never look back

[jollygreengiant2] 21/6/2021 17:16

It (about £13m) is just about enough to repair the Tier 1 capital buffer requirement but MBS say they will assess honoring 1999 and 2005 PIBS coupon "nearer the time". I suspect the PPDS investors will be offered a haircut and the PIBS get a tender too. I sold my 10,000 units for a modest profit after the 60% rise since Friday. Just glad to not be spending so much time fretting about what I knew was a stupid long shot at the time (2016). Never look back

[greatgiginthesky] 19/6/2021 15:17

Supreme Court ruling in favour. Grant Thornton owes £13.4m.

[dekle] 18/6/2021 10:32

Good to see a bit of movement here, I wonder why?

[my retirement fund] 10/5/2021 22:12

Better value to be had in West Brom imo, this is a bit of a crazy gamble

[thetoonarmy2] 12/1/2021 17:03

Yes picking up as the case againt Grant Thornton is now coming to a head and if Man build Soc were to be awarded anywhere upto £50 mill in damages well guess what price these PIBS will be many multiples of this price.

[dekle] 12/1/2021 10:54

These have been picking up over the last few days

[thetoonarmy2] 06/3/2020 08:56

Ah well it was maybe worth a punt picking up 25k of 8% yesterday hopefully back in profit now could be a good little invest and takeover talk for a bit of added excitement.

[dekle] 09/1/2020 11:53

Yes, the price has been creeping up. I have been buying to reduce my overall cost. They reported last time things were improving. Fingers crossed.

[holts] 07/1/2020 15:37

A little life here

[buttanc] 29/8/2019 10:56

Half year results today. As ever an unanticipated negative with impairments up at £921k, nevertheless there is a useful 454k profit reported. There is also the negative that they have been allowed to appeal to the Supreme Court which means some more costs down the line (assuming they lose, which would be my prediction). However the underlying capital position is improving.

CET1 was 4.69% (2016), 5.05%(2017), 4.95%(2018). I make it that CET1 capital has improved by 724k (+454 profit,-30k IRFS 9 adjustment, +300k profit on sale of MBS Property Ltd) at the half year. If you adjust RWA down by 5% in line with asset reduction, then I estimate CET1 at the half year has risen to circa 5.8%. Total capital remains strong, I make it 23.38% at half year.

By the way, there seems to be a mistake in note 15 in the accounts where the accumulated losses should read 10805 rather than 11259 at end June.

Without the higher impairments and extra litigation costs, MBS would be generating circa £3 million profit annually, which with the shrinking balance sheet would mean the CET1 would rise by circa 3% a year.

If a capital re-organisation is forced on them (which bar unforeseen disasters now seems unlikely), the PIBs total £14.788 million and so there's plenty of room between current prices and any likely haircut.

It's unlikely coupons will be turned on again in October, and that may be the case for some time. However my investment is looking for the capital gain, and whilst the impairments are a tad disappointing, the results show a significant strengthening of the capital position.

I'm slowly buying more, including another 10k of MBSR today. I'd be very interested in others views, and particularly whether they agree with my CET1 estimate for end of June.

[epo001] 04/1/2019 14:17

Thank you, my gut instinct was that they are worthless but here they are sitting at about £18 having been £22 yesterday. I was curious why.

[ukneonboy] 04/1/2019 14:12

Avoid them like the plague.

Essentially BOTH the Manchester 8% PIBS and the Manchester 6.75% PIBS are worthless.

Neither PIBS are paying the half yearly interest that they promised when they were launched.

The Manchester Building Society continues to make losses - and worst of all, it is under constant monitoring by the UK's Prudential Regulatory Authority.

[epo001] 04/1/2019 13:36

Noticed these today because of the sharp fall. Why do the shares have any value? Takeover gamble?

And for that matter, why the sharp fall?

[ukneonboy] 19/6/2018 20:11

Having recently lost it's £50 odd million claim against it's former Auditors, the Manchester Building Society is now in really deep financial trouble.

Unfortunately, this is no longer a case of managed declined, it's now a full blown GET IN THE LIFEBOATS scenario !!!

Savers should be ok as they are covered up to £85,000 by the Financial Services Compensation Scheme but holders of Permanent Interest Bearing Shares (PIBS), and other unsubordinated debts issued by Manchester Building Society are unlikely to get much back.

The Bank of England is monitoring Manchester Building Society's precarious financial position on a weekly basis and will shortly decide whether to let it fail, or push it into the arms of a bigger, more robust Building Society.

[ukneonboy] 14/3/2017 16:21

As I understand things, the Manchester B/Soc has INSUFFICIENT cash reserves to "buy-in" the 8% Permanent Interest Bearing Shares and 6.75% Permanent Interest Bearing Shares.

Furthermore any offer to buy-back these P.I.B.S is likely to be at a discount to their current market value.

Probably better to sell now in the market via a Stockbroker than waiting for jam tomorrow.

[cwa1] 14/3/2017 07:49

Further re non-payment:-



And:-

In addition, taking account of the Society's need to address its CET1 capital shortfall, the Board is evaluating whether to make an offer to buy back or convert the PIBS and other capital instruments. Any offer, if made, would reflect the current financial position of the Society and the material uncertainty regarding its long-term prospects.

[ukneonboy] 11/8/2016 18:06

As at 30 June 2016, the Directors of Manchester Building Society expect that the Society will have met its Individual Capital Guidance ("ICG") set by the Prudential Regulation Authority but unfortunately it will not meet the qualitative standards for the level of CET1 regulatory capital.

In such circumstances, article 141(3) of the Capital Requirements Directive IV, as a capital conservation measure, prohibits a distribution in connection with CET1 capital and Additional Tier 1 instruments. This would prohibit the payment of interest on both tranches of the Society's Permanent Interest Bearing Shares ("PIBS").

As a result, the Directors have stated that the half-yearly PIBS interest, scheduled to be paid in October 2016, will NOT now be paid.

* * * Manchester 6.75% PIBS are now a SELL * * * (MBSP)
* * * Manchester 8% PIBS are now a SELL * * * (MBSR)

[ukneonboy] 11/6/2016 20:36

The Manchester Building Society is sinking fast. It has reported a post-tax loss of £4.9m and a fall in reserves of £5.4m. This is not a one-off disaster due to an external shock. No, these results are symptomatic of a deep underlying malaise. The Manchester is in terminal decline, broken not by the financial crisis, nor by regulators, but by its own accountants.

The Manchester's problems started in 2012, when it discovered that its accounting violated IAS 39 (IFRS 9) hedge accounting rules. For some years, it had been hedging its interest rate risk on fixed-rate mortgages with simple interest rate swaps. To ensure that the portfolio was fully hedged, it accounted for both the swaps and the mortgages at fair value. This explanation is from a Note to the 2012 accounts:

The total value of mortgages at 31 December 2012 that had been subject to interest rate swaps was £167.7m. The swap and the designated mortgages were accounted for using the hedge accounting principles of IAS 39. Under the terms of IAS 39, the Society had calculated the fair value of the swaps and the fair values of the mortgages at each year end, since 2006 when it first adopted hedge accounting. As the fair values of both the swaps and the mortgages vary over time by reference to LIBOR rates, there was some volatility in these values at each year end. IAS 39 requires that, when there is an effective hedging relationship in place, the volatility in the market value of the swaps are offset in the Society’s accounts by the fair value adjustment to the mortgages – in practice, these fair values offset each other as they are in opposite directions, with limited volatility remaining in the Statement of Comprehensive Income.
So far, so good. But in 2012, the Manchester discovered that it should not have been using IAS 39 hedge accounting:

The Society has now identified that the swap arrangements it had entered into in respect of these assets did not meet the technical requirements for hedge accounting under IAS 39.
In fact, the fair value movements in the swaps were correctly recognised in the income statement. The problem was the offsetting fair value movement in the mortgages. It did not exist (my emphasis):

As a result of this, the fair value movements in the swaps remain to be recognised fully through the Statement of Comprehensive Income, whilst there is no fair value ascribed to the mortgage assets and they are recorded in the Statement of Financial Position at their amortised cost.
The gap was massive. As at 31 December 2011, the fair value that had been ascribed to the mortgages was £39.2m. All of this had to be stripped out. The 2010 and 2011 balance sheets were restated to reflect both the revaluation of the fixed-rate mortgages and the consequent unhedged loss on the interest rate swaps.

The 2012 income statement recorded a post-tax loss of £2.73m. But the restated 2011 loss was much worse, at £11.44m. The cumulative losses wiped out three-quarters of the Manchester's capital reserves:




Due to these unexpected losses, the Manchester recorded an additional Deferred Tax Asset of some £5m, anticipating 80% recovery over the next 10 years. But as we shall see, this was to come back to haunt them.

In 2013 the Manchester's auditor, Grant Thornton, resigned. Grant Thornton was subsequently fined by the FCA over its failure to spot the hedge accounting error. The Manchester is now suing it for negligence, claiming damages of £49m.

But the Manchester's accounting problems did not end there. In the 2012 accounts, the Manchester had confirmed that its 1999 PIBS issue was classed as equity. But in 2013, with a new auditor in place, it changed its mind. The 2012 accounts were restated to reclassify the 1999 PIBS issue as debt. Nor was that the only restatement. The Manchester also had to recognise a previously undiscovered insurance liability on a portfolio of Spanish mortgages:

It was identified during the 2013 year end audit that a particular clause of the mortgage contract meets the definition of an insurance contract; where a borrower dies or goes into long term care and a subsequent redemption receipt is less than the outstanding loan balance, the Society does not have any further ability to recover amounts from the borrower or their estate. The recognition of an insurance liability based on this insurance risk results in a prior year adjustment. The impact of the restatement is: An increase in provisions of £4.2m at 2012 (2011: increase of £3.1m) and an impairment loss of £0.5m in 2012 and reduction in interest and similar income of £0.2m, reflecting an adjustment to profit before tax of £0.7m, and a reduction in income tax of £0.2m and a reduction to 2012 opening retained earnings of £3.1m.
The cumulative effect of these restatements (plus adoption of a different accounting treatment for levies) reduced the Manchester's 2012 total capital by a further £7.6m, though £5m of this (the 1999 PIBS issue) was taken as a reduction in subscribed capital rather than reserves. In April 2013, the Manchester raised £18m of new CT1 capital with a PPDS issue.

During 2013, the Manchester sold its Lifetime mortgage book and its Icelandic debt assets at a profit of £1.53m, and it also exited from most of its interest rate swap portfolio. But despite this, it turned in a full-year loss of £7.1m. This was partly due to new impairment provisions of £8.7m, mainly on a third party mortgage book on which it discovered it could be liable for all losses. But £5m of the loss was due to write-down of the Manchester's Deferred Tax Asset. The Board was beginning to realise that the path to recovery for the Manchester would be an extremely rocky one.

The 2013 loss reduced the Manchester's capital levels so much that it was forced to stop lending. It became a zombie. Throughout 2014, it concentrated on shrinking its balance sheet and shoring up its capital. But there were no further disasters: it turned in a post-tax profit of £4.4m and its gross capital rose from 7.3% to 10.4%. The Board cheerily said that it would examine the possibility of returning to lending in 2015.

The cheerfulness was short-lived. The Manchester did not return to lending in 2015: the Board's investigation revealed that its core equity was too weak to support more lending. And the 2015 loss made matters worse.

The 2015 loss is perhaps the saddest part of the Manchester's story. It arises mainly from two enormous impairments that are themselves a consequence of the Manchester's decline.

The first is a £2.5m impairment of the carry value of the Manchester's head office. The Manchester simply no longer needs a building of that size. But as it is the Manchester's only branch, it is stuck with it.

The second is a further £4.3m writedown of the Deferred Tax Asset, making a total write-down of over £9m. That is nearly all of it. The Board has effectively admitted that the Manchester is unlikely ever to make enough profit to be able to use the tax asset to offset future tax liabilities.

The final nail in the coffin is the recognition, in the Notes to the Accounts, that the Manchester may not be able to continue as a going concern. It does not fully meet PRA capital requirements:

....there is a shortfall of £1.6m against this CET1 expectation as at 31 December 2015. Under the new regulatory capital regime effective 1 January 2016, at that date there is a £2.8m shortfall.

After the year end, on 11 April 2016, the Society received new Individual Capital Guidance (“ICG”) from the PRA setting out the amount of regulatory capital the Society is required to hold. The Board has reviewed the capital resources following the new guidance from the PRA and has concluded that the ICG and CRD IV buffer requirements are met. The Board also concluded that the Society meets the quantitative aspect of the PRA buffer. As previously, the Society is expected to hold a certain proportion of its capital buffers in CET1 capital; this remains challenging under the new guidance and the Society may not meet these expectations going forward.
Realistically, the Manchester is unlikely to be able to increase its capital quality sufficiently to return to lending, But without a return to lending its long-term outlook is bleak. It desperately needs a capital injection. But from where will this come?

Issuing more core equity is a non-starter, because of the Manchester's mutual status and poor outlook. The best outcome would be a buy-out or takeover, perhaps - Co-Op Bank style - by a friendly hedge fund or two. Though the market for distressed mutuals is pretty thin, these days.

But if there is no possibility of rescue, then it will eventually become insolvent. Under new European banking rules, resolving it would mean imposing losses on shareholders and creditors. Those who bought the PPDS in 2013 may lose their entire investment, as may holders of the 1999 and 2005 PIBS. And in the worst scenario, large depositors may find themselves with a haircut.

The Manchester has joined the ranks of the living dead. Even if the Grant Thornton damages claim is successful, it will probably come too late to save it. Maybe the regulator will kill it off. It would be a kindness.

[ukneonboy] 16/3/2015 17:05

Manchester Building Society is claiming more than £49m from the Grant Thornton, accusing the accountancy firm of negligence when it audited the society.

The mutual lender said the claim, lodged at a Manchester court, was for “breach of contract, negligence and breach of statutory duty” from 2006 until 2013. It said the claim covered the amount the society allegedly lost because of Grant Thornton’s advice on how to account for interest rate swaps.

In a statement, Manchester Building Society said: “The claim primarily covers Grant Thornton’s advice and audit services relating to the implementation and application of hedge accounting by the society. If the society is unable to reach satisfactory agreement with Grant Thornton the matter will progress to a court hearing.”

A spokesperson for Grant Thornton said: “As a large professional services firm, there are inevitably occasions where we become involved in legal claims. Naturally, our obligations of confidentiality mean that we cannot comment on the detail of any litigation in which the firm is involved.”

The claim covers an accounting problem that the watchdog, the Financial Reporting Council, has been investigating since August 2013.

Grant Thornton resigned as the building society’s auditor in 2013. In April of that year, the society changed the way it accounted for its long-term mortgages and interest rate movements after finding that its previous method did not comply with international accounting standards.

The society was forced to restate its 2011 accounts to reflect a £23.5m reduction in the fair value of its interest rate swaps and £5.4m of swap interest costs. The change sent the society to a £21.9m annual pre-tax loss from the £600,000 profit originally reported.

It had to raise £18m of capital by selling profit participating deferred shares (PPDS) to fill what it called “a material downward restatement” of its reserves caused by the accounting change.

PPDS are shares designed for building societies, which are not allowed to issue ordinary shares, to strengthen their balance sheets. They were devised to let mutual lenders increase their capital to absorb potential losses such as from falling property values.

Manchester is Britain’s 16th biggest building society with 29,000 investing members and 5,700 borrowing members.

Interest rate swaps are a form of insurance that is meant to protect the buyer against fluctuations inrates.

[ukneonboy] 13/1/2015 09:15

According to recent newspaper reports, it appears that Manchester Building Society may soon be taken-over by Nationwide Building Society.

Nationwide Building Society previously provided additional "working capital" to the Manchester Building Society and it recently engaged Rothschild Private Bank to assess the financial health and wellbeing of it's smaller rival.

Manchester Building Society was forced to raise £18m from the Nationwide, after an interest rate swap went wrong.

The Manchester bought the swap in the hope of protecting itself against upward moves in interest rates. But the interest swap went bad in 2011 when it emerged that it had not decreased the risks or liabilities by as much as had been claimed in it's Financial Accounts.

The Nationwide Building Society previously acquired Cheshire Building Society and Derbyshire Building Society, so it could easily integrate the Manchester Building Society into it's own operations.