View from City Road: The collar ties in nicely

BUILDING society bonds and floating rate notes (FRNs) are becoming rather more interesting and complex than anything the societies have to offer over the counter to retail depositors. The latest innovation is a pounds 100m FRN launched yesterday for Leeds Permanent by Salomon Brothers.

The novelty is that it has a collar - Salomon says it is the first in sterling FRNs - which means that the floating coupon ranges between 7 and 11 per cent. With base rates now at 6 per cent and the prospect of another pre-Budget cut to 5 per cent, it is not surprising the issue sold out in half an hour. The gilt on the gingerbread with a collar, of course, is that investors are protected against a rise in rates up to a point, while an FRN is also tradeable.

This partial hedging function makes a collared FRN a useful device for corporate treasurers and some fund managers. But the Leeds issue goes one step further.

It has been structured to attract retail investors since it is available through brokers in pounds 1,000 chunks and can be bought in registered form. Salomon believes some has been distributed to retail investors through regional brokers.

As senior debt with a redemption date, it has higher security than building society Permanent Interest Bearing shares, which are subordinated and irredeemable. But private investors would have to be very sure that interest rates will stay in the low single figures before a collared FRN with a 7 per cent floor becomes better than a Leeds deposit, given the risk of capital loss if rates start rising.