West Bromwich Building Society has agreed with holders of the Society’s subordinated debt to exchange the full outstanding principal amount of the Society’s subordinated debt, totalling £182.5 million, for a new instrument which will qualify as core tier 1 capital.

The Capital Exchange will materially strengthen the Society’s core tier 1 capital ratio from 6.8% (as at 31 March 2009) to 11.6% on a pro-forma basis. At this level, the Society’s core tier 1 capital ratio is amongst the highest in the sector. Following the Capital Exchange, which has received FSA approval and is due to complete by the end of July, some 82% of the Society’s capital will be core tier 1, so enabling the Society to demonstrate resilience in the face of stress-test scenarios.

It is due to announce results for the financial year ended March 31, 2009 next Monday, but faces problems of actual losses on commercial property loans and having to make provisions for possible losses on them.  The West Brom will now be able to continue as an independant mutual with it's strengthened balance sheet.

The West Brom is the 8th. largest building society in the UK and made a similar strategic move to the failed Dunfermline BS in going into  commercial property lending too quickly. It tried to build it's lending book quickly by going into bigger ticket properties, those worth more than £500,000, and those were the same properties which were targetted by institutional investors causing a bubble in their values, which has now collapsed by 40%.

Robert Sharpe, Chief Executive, said:

“The exchange of the Society’s tier 2 sub-debt into core tier 1 capital materially strengthens our capital position and, under stress-test scenarios, has demonstrated our ability to withstand a further significant deterioration in market conditions.

We have a solvency ratio of 14% and, post exchange of the sub-debt, a core tier 1 ratio of 11.6%, ratios which are amongst the strongest in the sector. With this firm footing, we are well positioned for the future.”