Yorkshire Building Society buys back £724m of debts

The UK’s second-biggest building society yesterday completed the early purchase of half of the £1.5bn of bonds it issued under the Government’s Credit Guarantee Scheme (CGS), becoming the first institution to do so.

The mutual said its “excess liquidity” allowed the re-purchase of the notes, which were originally issued during the credit crunch in 2009. Like many societies the Yorkshire relies on wholesale funding as well as customer deposits to pay for its mortgage lending.

“We’re able to do it because we’re sitting on a lot of cash,” said Andy Caton, Yorkshire’s corporate development director.

“We did the Egg transaction in November and it brought in a large surplus cash position.”

Internet bank Egg came with £400m of mortgages, heavily outweighed by £2.1bn of savings.

The Yorkshire needed approval from HM Treasury and the Financial Services Authority for the bond buyback – the maximum amount permitted. The bonds comprised £600m in sterling, £750m in euros and $350m US dollars, and were due for repayment in March and October next year. The tender was fully subscribed.

The building society paid a premium to investors, plus a cancellation fee to the Treasury to buy the notes back early.

“It gets pretty costly towards maturity,” said Mr Caton.

“It makes a lot of sense if we can re-buy this debt early.

“The investors are getting a profit because we’re paying above the market price.

“Hopefully it demonstrates to the market that we can provide liquidity in our own paper. There’s a lot to be said that we are strong enough in our financing position and cash liquidity that we can do this. It’s the first time it’s been done in the UK.”

The CGS was launched in October 2008 to provide short-term liquidity for banks and building societies because of a drought of wholesale funding, and allowed them to issue Government-guaranteed debt.

“At the time frankly there was no other way (of raising wholesale funds),” said Mr Caton.

“At the time we were doing this the covered bond market had not recovered. It was really just trying to lengthen the duration of our funding.”

This summer the Government told participating CGS institutions, which include Royal Bank of Scotland, Barclays, Yorkshire Bank and Skipton Building Society, that they could buy back and cancel the debt early.

Mr Caton said the Yorkshire plans to return to the bond market next year to raise more wholesale funds, but it is not essential.

“We like to have a regular issuance pattern,” he said. “It we can maintain that regular issuance (then) we’re lending it on in mortgages.”