Fixed-Income Investments

Permanent interest bearing shares (PIBS) – A return / risk analysis
Permanent interest bearing shares, or “PIBS”, are a niche segment of fixed-income investments, providing potential investors with a number of interesting and favorable properties, but also bearing very specific risks investors should be aware of.

PIBS are securities issued by building societies (financial institutions structured as mutual organizations, which are predominantly active in mortgage lending), usually at fixed, in some cases at floating interest rates. PIBS are classified as a form of risk capital, ranking below subordinated debt. For building societies, which cannot raise capital on the markets by issuing ordinary shares, PIBS are used in a way public limited companies would use preferred shares.

Although a particular issue of PIBS is callable early, all PIBS are generally permanent.

The PIBS market
In the UK (the most important market), 47 building societies hold assets of approximately £311 billion. There are around 20 million investing members and 2.5 million borrowing members.

Advantages
• Fixed coupon providing a yield higher than that of other corporate bonds.
• Voting right
• Diversification benefits in bond / fixed-income portfolios
• Special tax provisions

Risks
• Business risk
• Duration of issues
• Credit risk
• Callability
• Duration risk
• Liquidity risk
• Correlation
• Lack of a hedge

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