West Brom in eleventh hour battle for survival

Building society turns to lenders for new capital to avoid rescue deal from regulator
  • @davidprosserind

West Bromwich Building Society was last night locked in negotiations with its creditors as it sought to avoid becoming the latest in a string of mutual organisations to fall victim to the financial crisis.

The society, which was last month forced to deny reports it was on the verge of collapse, is hoping to persuade its lenders to convert about £180m of debt into a new financial instrument that would qualify as capital, enabling it to satisfy stress tests imposed upon it by the Financial Services Authority, the chief City regulator.

West Bromwich, the country's eighth largest society, has been in talks with the FSA for weeks over its dwindling capital strength and has also held talks with stronger societies about a merger or takeover.

However, the leading candidate for such a deal, Coventry Building Society, is now understood to have cooled on the idea of rescuing its West Midlands-based neighbour.

If there is no deal to save it, West Bromwich would be forced to turn to the FSA for a rescue solution of the sort seen earlier this year, when the regulator in effect forced the break up of struggling Dunfermline Building Society. Some of its businesses were sold off, while other assets were transferred to the Bank of England's Special Resolution Regime.

Last night, however, West Bromwich, which needs to provide customers with some reassurance by Monday, when it is due to announce its annual results, said it was close to an agreement with its lenders.

West Bromwich said it was "in advanced discussions with holders of the society's subordinated debt to exchange the full outstanding principal amount of the society's subordinated debt, totalling £182.5m, for a new instrument, which will qualify as core tier 1 capital".

Such a deal, which could be unveiled as early as today, would enable West Bromwich to continue operating as an independent society, defying its critics at the eleventh hour.

The society has been forced to take radical action to safeguard its future after adopting a more aggressive business model than many of its rivals. It has a £1.5bn exposure to the crisis-hit commercial property sector, as well as £3.5bn in outstanding buy-to-let mortgages, a sector of the home loan market that is proving more vulnerable to rising arrears and repossessions than any other.

Last autumn, Robert Sharpe, the former chief executive of Portman Building Society, which was sold to Nationwide last year, was brought into West Bromwich to turn the society's fortunes around, though it is still expected to reveal substantial losses on Monday.

Mr Sharpe has attempted to cut costs at West Bromwich, axing about 15 per cent of its 1,000-strong workforce, but that was not enough to prevent Fitch, the credit ratings agency, downgrading its credit status last month. The society has £10bn in assets, 600,000 customers, and almost 50 branches.

West Bromwich has previously denied being in difficulties, claiming it knew nothing of claims the FSA was seeking to broker a rescue deal for it, but has since refused to comment, other than the statement released yesterday.

The FSA itself also refused to comment last night, but the continuing problems in the sector have angered the regulator, which last month sent a spokesman to the industry's annual conference to read it the riot act. The regulator said it had warned building societies "over and over again" about their risky lending practices but "clearly not everyone was taking note".