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This announcement contains inside information.

West Bromwich Building Society (the “Society”) is pleased to announce plans for a liability management exercise (the “Liability Management Exercise” or “LME”) in relation to its 3,650 Profit Participating Deferred Shares (the “PPDS”) and its £75 million 6.15 per cent. Permanent Interest Bearing Shares (the “PIBS”).

Summary

• Society’s capital position to be secured, allowing our existing lending plans to continue unchanged
• Binding commitments received from holders representing approximately 75.5 per cent. of the PPDS and 49.7 per cent. of the PIBS with respect to the plans set out in this announcement
• Society’s capital structure to be modernised through issues of Core Capital Deferred Shares (the “CCDS”) and 11 per cent. Tier 2 subordinated notes (the “Tier 2 Notes”)
• Institutional holders of PPDS to be invited to exchange their holdings for a combination of CCDS, Tier 2 Notes and cash on expected terms outlined further below
• Institutional holders of PIBS to be invited to exchange their holdings for a combination of CCDS and cash on expected terms outlined further below
• Retail holders of PIBS to be invited to tender their holdings for cash on expected terms outlined further below
• Resolutions to be proposed to holders of the PPDS and the PIBS to enable the Society, amongst other things, to effect mandatorily the exchange of any remaining PPDS for CCDS, Tier 2 Notes and cash, on substantially the same economic terms as the terms of the PPDS exchange offer
• LME expected to be launched in the first half of 2018, subject to necessary consents and approvals of the Prudential Regulation Authority (the “PRA”) and following preparation of the detailed offer documentation and listing particulars
• Upon successful conclusion of the LME and assuming only those PIBS holders from whom binding commitments have been received by the Society participate in the LME, on an indicative basis, the Society’s common equity tier 1 (“CET1”) ratio is expected to decrease by approximately 0.4 percentage points to 13.7 per cent., its total capital ratio (with full impact of CRD IV implementation) is expected to increase by approximately 0.4 percentage points to 15.2 per cent. and Member Reserves are expected to increase by approximately £42 million.

The PRA has accepted the plan for the LME, including the core commercial terms for the transaction summarised in this announcement. Implementation of the LME is subject to regulatory approvals once the Society has made the formal submissions required under applicable prudential rules for transactions of this nature, including in respect of the proposed modifications to the terms of the PPDS and the PIBS, their purchase and exchange pursuant to the LME and the issuance of the new CCDS and Tier 2 Notes.

Background

In February 2017, the Society announced that it was seeking clarification from the European Banking Authority (“EBA”) in relation to the eligibility of its PPDS as CET1 capital, following an investor challenge. The Society has not yet received clarification from the EBA.

While the Society continues to believe that the PPDS meet the CET1 criteria in all respects, the Society in the meantime has, in line with its February announcement, had constructive engagement with major holders of both the PPDS and the PIBS with respect to its options to guard against the possibility of the EBA deciding that the PPDS no longer qualify as CET1. These included discussions about the potential for the following:

• the PPDS holders agreeing to certain variations to the Special Conditions of the PPDS to address the investor challenges raised with respect to the qualification of the PPDS as CET1 capital; and
• a potential offer by the Society to exchange the PPDS into CCDS (an instrument which has been specifically designed to comply with the CET1 capital criteria under the current prudential rules published in 2013, and which has been issued by other building societies).

It was clear throughout discussions with these major holders that, irrespective of the outcome of the EBA’s deliberations on eligibility of the PPDS, the major holders and the Society were aligned in their views that a modernisation of the Society’s capital structure would be appropriate. Following these discussions, the Society is pleased to announce its plans to conduct an LME involving the PPDS and the PIBS.

On an indicative basis only, had the LME been successfully completed on 30 September 2017 (the latest reporting date of the Society prior to this announcement) and assuming only those PIBS holders from whom binding commitments have been received by the Society participate in the LME, the Society expects that its CET1 ratio would have decreased by approximately 0.4 percentage points to 13.7 per cent., its total capital ratio (with full impact of CRD IV implementation) would have increased by approximately 0.4 percentage points to 15.2 per cent. and Member Reserves would have increased by approximately £42 million. On the same basis but assuming that 100 per cent. of PIBS holders participate in the LME, the Society expects that its CET1 ratio would have increased by approximately 0.3 percentage points to 14.4 per cent., its total capital ratio (with full impact of CRD IV implementation) would have increased by approximately 1.1 percentage points to 15.9 per cent. and Member Reserves would have increased by approximately £52 million.

Given that the variations to the Special Conditions of Issue of the PPDS will address the investor challenges raised with respect to the PPDS, the Society has elected to withdraw its request for clarification from the EBA.

Jonathan Westhoff, Chief Executive of the Society, said:

“I am pleased to be able to announce our capital management plans today. The Board considers the measures put forward to be in the best interests of the members of the Society as a whole and will secure and modernise the Society’s capital base. Undertaking these plans will secure the strong capital position of the Society and allow us to continue with our plans to deliver exceptional lending and savings products to our membership.”

To read the Society’s full announcement, please click here.