Price must be right for bonds from Nationwide

ANALYSTS last night warned that bonds being issued by the Nationwide Building Society to plug a £1.5 billion hole in its balance sheet will have to be “competitively priced” in order to attract investors amid the troubles that have engulfed fellow mutual the Co-operative Bank.

Nationwide is believed to be preparing to issue a £500 million corporate bond within weeks, with a second bond of ­between £500m and £1bn being pencilled in for later this summer. Picture: PA

Nationwide is believed to be preparing to issue a £500 million corporate bond within weeks, with a second bond of ­between £500m and £1bn being pencilled in for later this summer.

Some analysts in the City have estimated that the capital hole at the heart of the building society runs to at least £2bn.

Simon Willis, banking analyst at broker Daniel Stewart, said: “There has been a good appetite for corporate bonds in the past 12 months because it has been difficult to raise equity. Interest rates are also very low, so bonds have been attractive to corporates. Nationwide should benefit, but its brand has been partly tarnished by what has happened at the Co-op.

“Both the Co-op and Nationwide were more involved in commercial property bad loans than some thought. So that means it will all come down to how bad are things at Nationwide, how much do they want to raise, and perhaps most importantly, the price.”

A Nationwide spokesman declined to comment on “speculation” surrounding an issue of bonds by the group, but said that mutuals also had other ways of addressing shortfalls of capital, including retained profits. It is estimated that Nationwide has built up £700m of retained profits in the past three years.

The Prudential Regulation Authority identified Nationwide as having a £400m capital black hole on its balance sheet. However, tightening by the Bank of England of the so-called “leverage ratio” of banks – which judges the lender’s equity as a percentage of their loans – has had City analysts speculating that Nationwide’s black hole could amount to £2bn.

News of the potential bonds issues comes just a week after it was revealed that the Co-operative Group is to float part of its banking operations on the stock market later this year in a bonds-for-equities swap to address the £1.5bn shortfall in its own balance sheet.

That black hole scuppered the Co-op’s plan to buy 632 branches from Lloyds Banking Group, which the bank had been ordered to be sell by the European Commission in return for its taxpayer bailout in the 2008 financial crash.

Over the weekend, it emerged that Lloyds has asked Brussels for a two-year extension to the deadline for selling the branches, taking the cut-off point to 2015.

Reports have further suggested that the Co-operative Group – which also owns funeral parlours and supermarkets – will be unable to claw back any money from former chief executive Peter Marks or ex-Co-op Bank boss Neville Richardson, despite the group’s massive capital shortfall and losses faced by bondholders.

Meanwhile, Andrea Leadsom, a Conservative member of the Treasury Select Committee, yesterday called for donations by the Co-op to the Labour Party to be axed before it penalise bondholders.

l FEWER than one in four banks expect to increase their use of central bank funding and almost 40 per cent expect to repay such programmes in the next six months, according to the results of a survey today, the Ernst & Young European Banking Barometer.