What are Permanent Interest Bearing Shares (PIBS)?
Permanent Interest Bearing Shares (PIBS) are a type of non-redeemable financial security, typically issued by building societies. These shares are notable for offering a fixed interest rate at issuance, often ranging between a generous 10% to 13.5%. This high yield can make PIBS an enticing option for investors seeking substantial and ongoing income streams.
However, despite their attractive yield, PIBS come with a distinct set of risks. They rank low in the order of repayment in the event of the issuer’s liquidation, lying just above shareholders in terms of priority. This characteristic increases the potential financial risk for PIBS holders.
Another crucial aspect to consider is the liquidity of PIBS. The market for these securities is relatively small, with an estimated value around £800 million. This limited market size can render buying and selling PIBS challenging, possibly leading to difficulties in finding buyers and receiving a fair price in secondary markets.
Historical Context and Investor Appeal
The birth of PIBS is deeply intertwined with the operational needs of building societies to secure long-term capital. By offering high yields, these instruments have traditionally attracted investors who are less concerned with liquidity and more focused on steady, long-term returns.
Key Risks and Considerations
While the allure of high returns is undeniable, potential investors must soberly assess the liquidity risks and the low repayment priority associated with PIBS. These factors can significantly impact the return profile, especially in less stable financial periods.
Related Terms
- Building Societies: Financial institutions that offer banking and related financial services to their members. Building societies are traditional issuers of PIBS.
- Fixed-Income Securities: Investments that provide returns in the form of regular, fixed interest payments and the return of principal at maturity.
- Liquidation Priority: The order in which creditors and investors are paid in the event of a company going bankrupt.
- Secondary Market: A market where investors buy and sell securities they already own.
Suggested Reading
- “The Intelligent Investor” by Benjamin Graham: Provides foundational knowledge in investing, particularly in securities, which can be crucial for understanding products like PIBS.
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman: Offers a detailed look at various forms of fixed-income securities, their market behaviors, and associated risks.
Understanding PIBS requires a balanced view of their potential gains against the backdrop of significant risks, making it crucial for investors to conduct thorough due diligence before engagement.
