WestBrom deal offers capital lifeline

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The eleventh hour deal to save West Bromwich Building Society from a State bail-out could give the mutual sector a lifeline through which to raise much-needed capital, City regulators said yesterday.

The emergency financing deal done by West Bromwich, which was arranged in conjunction with the Financial Services Authority, will see the society convert £182m of subordinated debt into "profit participating deferred shares", which will count as capital, enabling the organisation to pass the regulator's balance sheet stress tests.

Holders of the shares, which will be tradable, are entitled to receive up to 25 per cent of the building society's future post-tax profits.

A spokeswoman for the FSA said it had been working closely with the building society sector, where many organisations are keen to raise new capital, in order to create a new type of instrument that enables such issues without full-scale demutualisation. "It is in members' interest that the sector has a viable and vibrant future," she said.

However, there was some criticism yesterday of the deal done by West Bromwich, on the grounds that it will dilute existing members' ownership of the society. The profits deal may also make it tougher for the society to offer competitive deals on savings and mortgages.

A spokeswoman for the Building Societies Association said there would be downsides to this sort of share issue, but warned the sector was in need of new ways to seek funding. "You could argue that there is a dilution of the mutual ethos, but this is a practical change," she said.

Holders of the new instruments will only be entitled to one vote in ballots of societies' memberships, however many shares they own.