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Nationwide CCDS Milestone

23 August 2017 by Mark Holman

Back in 2013 we blogged about a genuine development in the bank capital sector when Nationwide Building Society issued the first Core Capital Deferred Shares or “CCDS” instrument (PIBS Mark II – Twenty Four AM). Essentially it was a permanent form of capital that satisfied the PRA’s new strict Basel 3 requirements and was suited to a mutual borrower who typically had no access to this form of capital.

Four years ago capital was trading at a high premium and, being a new type of instrument, the CCDS added a little extra on top to help compensate investors in understanding this novel product. After an open and extensive roadshow Nationwide issued £550m of their CCDS in November 2013 with a slightly higher than anticipated distribution of 10.25%. Now, regular readers of our blog will know our view that we consider Nationwide one of the safest financial institutions globally, and so it will come as no surprise that we were one of those that embraced this new product at the time. However, even we have been surprised at the performance of this instrument, which this week broke through the 100% return barrier!

Today the 10.25% CCDS securities are trading at 162.00 and, to date, have paid out just over 38% in distributions, making them one of the best performing non-distressed instruments that I can think of in fixed income. Nationwide is the polar opposite of distressed, and continues to improve fundamentally, posting incremental gains every quarter to its CET1 capital levels, to the point that today it has in excess of 26%, which is more than double the EU average. Its leverage ratio is also very comfortable these days at 4.4% despite its focus on low margin, higher volume products.

CCDS are not rated and are not likely to be given their scarcity, but Nationwide’s most junior debt, its AT1, is rated BB+; we would argue an upgrade is overdue given the consistent fundamental improvement.

The yield on the CCDS 10.25% is circa 6% which clearly reflects the change in the underlying environment as well as Nationwide’s continued strong operating performance. However, as the only CCDS ever issued by a UK financial institution, and one of only two in the world, they still offer an interesting rarity and complexity premium, but perhaps without some of the financial risks that have plagued the banking sector.

Despite having written negatively on innovation a couple of weeks ago with our views on Tesla, when it comes to fixed income, innovation isn’t always a bad thing.

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