CFM14140 - Understanding corporate finance: regulatory capital: the legal and regulatory framework: tiers of capital: Permanent Interest Bearing Shares and Core Capital Deferred Shares

Permanent Interest Bearing Shares

A building society may issue permanent interest bearing shares (PIBS) to strengthen their capital base, and which form part of a building society’s Tier 1 capital (CFM14120). These are defined as deferred shares for the purposes of BSA86/S119.

To qualify as PIBS the shares must have the following characteristics:

• Permanence. There can be no repayment with the exception of winding-up or with the consent of the FSA.
• Interest bearing. The rate may be fixed or variable. The rate may be directly related to the society’s profits.
• Non-cumulative. Investors lose the right to any interest that is passed.
• The payment of interest can be passed or abated if the society’s capital position would otherwise be impaired.
• The writing down of the outstanding principal can absorb losses.
• Rank behind ordinary building society shares on a winding-up.
• Become subordinated debt if the building society converts to a plc.

PIBS ceased to qualify as Tier 1 capital from 1 January 2014.

Core Capital Deferred Shares

From 1 January 2014 building societies needing to raise core Tier 1 capital may issue Core Capital Deferred Shares (CCDS).

The Building Societies (Core Capital Deferred Shares) Regulations 2013 No. 460 ensure CCDS are taxed as shares for the issuer and the investor and the coupon is not deductible in computing profits.