Market Action

April 17, 2008

This is about as far as one can get from preferred shares … but it’s interesting! There has been a lot of kerfuffle lately about the seeming randomness of the commodity futures basis in the States. Econbrowser has a guest-poster, Professor Scott Irwin, who explains what this means and why it’s important.

My suspicion is that it will have something to do with unsettled credit conditions. If you’re going to buy spot grain and sell a futures contract about it, you have a storage and financing problem that needs to be solved. First you need storage, then you need a price on your storage, then you need financing, then you need a price on your financing. It’s not just the spot and future price! I suspect that the financing requirements are injecting a little randomness into the process … I was once speaking to a bank rep, who very seriously intoned “The Bank [the capital “B” was audible] does not finance arbitrage.” Now, he was a very junior bank employee, but those were good times! I’m no expert, but I’ll bet on the financing aspect.

Prof. Irwin points out that there is an official hearing April 22 … we’ll see what comes of that. The post has some good comments.

Calculated Risk references a Times article that indicates:

It is understood that the Treasury about to finalise a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.

It is not clear to me whether the word “swap” means “collateralize a loan with”, as in the Fed’s TSLF, or “trade”, as in Willem Buiter’s idea mentioned yesterday. I think the former is a great idea, provided that the loan is at a penalty rate; I have yet to be convinced that desperate measures such as the latter are necessary.

However, there is no doubt that excesses in the UK were just as spectacular as those in the US:

Richard Lee spent 5.3 million pounds ($10 million) buying 20 rental homes across the U.K. with just 150,000 pounds of his own money. Today, the properties are worth about 60 percent less and owned by the banks that financed the purchases.

The idea of outright government purchases of debt is hardly unique to the UK. There are plans afoot to have the US purchase student loans:

The U.S. House of Representatives, trying to avert a looming shortage in available student loans, approved allowing the Department of Education to buy federally guaranteed loans that lenders are unable to sell to private investors.
…
The global credit crunch has raised student-loan makers’ financing costs, and they’re unable to raise the rates they charge for federally guaranteed loans because the rates are locked in by the government.

SLM Corp., known as Sallie Mae, has stopped offering consolidation loans, which allow borrowers to combine several loans into a single one charging a lower rate. The company said today that new student loans are being made only at a loss.

Agencies in several states including Massachusetts, Michigan and Pennsylvania have announced plans to stop providing federally guaranteed student loans.
…
The legislation passed by the House today would let lenders sell their debt to the Department of Education at a premium. The move is designed to give investors more confidence in securities backed by the loans.
…
A similar bill has been introduced in the Senate. A Bush administration statement yesterday backed most provisions of the House measure while recommending some changes to ensure that the secretary of education has “the necessary authority and flexibility needed to respond to the unfolding situation.” The legislation is H.R. 5715

What tangled webs are a surprise, when first we seek to subsidize!

Volume dropped off to light levels, but the market edged up with low price volatility.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.10% 5.14% 28,897 15.33 2 +0.2053% 1,089.3
Fixed-Floater 4.80% 5.21% 63,975 15.26 8 +0.0772% 1,041.9
Floater 5.02% 5.06% 64,880 15.41 2 -0.0538% 830.3
Op. Retract 4.85% 3.53% 85,405 3.28 15 -0.0282% 1,047.4
Split-Share 5.36% 5.94% 87,135 4.08 14 -0.0590% 1,032.2
Interest Bearing 6.16% 6.22% 63,151 3.89 3 -0.1684% 1,099.8
Perpetual-Premium 5.92% 5.60% 193,254 5.51 7 +0.0284% 1,016.5
Perpetual-Discount 5.66% 5.69% 320,057 13.65 64 +0.1177% 922.0
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixFloat -1.2340%  
FBS.PR.B SplitShare +1.0363% Asset coverage of just under 1.6:1 as of April 10, according to TD Securities. Now with a pre-tax bid-YTW of 5.68% based on a bid of 9.75 and a
W.PR.J PerpetualDiscount +1.4388% Now with a pre-tax bid-YTW of 5.87% based on a bid of 23.97 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.9431% Now with a pre-tax bid-YTW of 5.43% based on a bid of 21.51 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BNS.PR.J PerpetualDiscount 132,090 Now with a pre-tax bid-YTW of 5.48% based on a bid of 23.77 and a limitMaturity.
GWO.PR.F PerpetualPremium 132,023 Now with a pre-tax bid-YTW of 4.56% based on a bid of 26.22 and a call 2008-10-30 at 26.00.
NTL.PR.F Scraps (would be Ratchet, but there are credit concerns) 125,375
TD.PR.O PerpetualDiscount 103,150 Now with a pre-tax bid-YTW of 5.26% based on a bid of 23.11 and a limitMaturity.
PIC.PR.A SplitShare 106,981 Asset coverage of just under 1.5:1 as of April 10, according to Mulvihill.
NA.PR.M PerpetualDiscount 39,120 Now with a pre-tax bid-YTW of 6.07% based on a bid of 24.87 and a limitMaturity.

There were nine other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Issue Comments

GBA.PR.A Downgraded to Pfd-4(high) by DBRS

DBRS has announced that it:

DBRS has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-4 (high) from Pfd-3 (high) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each) to provide downside protection of approximately 47% to the Preferred Shares (after issuance costs).

The net proceeds from the initial offering were used to purchase a portfolio of Canadian securities that were pledged to the National Bank of Canada (the Counterparty) to enter a forward agreement (the Forward Agreement) in order to gain exposure to a portfolio of common shares (the Bank Portfolio) issued by eight of the world’s largest banks – Citigroup Inc., Bank of America Corporation (DE), The Royal Bank of Scotland Group plc, UBS AG, Banco Santander SA, BNP Paribas, Société Générale and Deutsche Bank AG.

Holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.5% per annum. The Company provides Class A Shareholders with distributions of capital gains when declared by the board of directors. Since inception, the Capital Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the net asset value (NAV).

Since inception, the NAV has dropped from about $19 to $11.95 per share (as of April 15, 2008), a decline of 37%. As a result, the current downside protection available to the Preferred Shareholders is approximately 16%. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry. In general, the valuations of the common shares of international banks have experienced significant volatility over the last year due to credit concerns and large writedowns.

The downgrade of the Preferred Shares is based on the lower level of asset coverage available to cover the Preferred Shares principal.

The redemption date for both classes of shares issued is December 15, 2012.

GBA.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splits was discussed on March 19. This action follows a downgrade from Pfd-2 on 2008-1-16. That was FAST!

Issue Comments

CBW.PR.A Downgraded to Pfd-3(low) by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican World Banks Split Corp. (the Company) to Pfd-3 (low) from Pfd-2 (low) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In November 2007, the Company raised gross proceeds of $96.1 million by issuing 4.805 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each). The initial structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by bank-based financial institutions with strong credit quality (World Banks). The Portfolio is actively managed by the Manager to invest in World Banks that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to the Canadian dollar at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $15 after giving effect to such distributions. Since the Company’s NAV has decreased below $15, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward.
The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. Since inception, the NAV has dropped from $20 per share to $13.06 (as of April 11, 2008), a decline of about 35%. As a result, the current downside protection available to the Preferred Shareholders is approximately 23%.

The downgrade of the Preferred Shares is based on the greatly reduced asset coverage available to cover repayment of principal.

The redemption date for both classes of shares issued is December 2, 2013.

CBW.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial split shares has been previously discussed.

Update: Financial statements and other information is available on the fund’s website.

Issue Comments

CIR.PR.A Downgraded to Pfd-3 by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican International Financial Split Corp. (the Company) to Pfd-3 from Pfd-2 (low) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In March 2007, the Company raised gross proceeds of $150 million by issuing 7.5 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each). The initial structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by international financial institutions (IFS) with strong credit quality. The Portfolio is actively managed by the Manager to invest in IFS that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to the Canadian dollar at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.0% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $16.50 after giving effect to such distributions. Furthermore, the Company cannot make special distributions to the Class A Shares if the NAV drops to less than $20, unless the distribution is required to eliminate tax on net capital gains. Since the Company’s NAV has decreased below $16.50, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward.

The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. Since inception, the NAV has dropped from $20 per share to $13.81 (as of April 11, 2008), a decline of more than 30%. As a result, the current downside protection available to the Preferred Shareholders is approximately 28%.

The downgrade of the Preferred Shares is based on the greatly reduced asset coverage available to cover repayment of principal.

The redemption date for both classes of shares issued is December 2, 2013

CIR.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splitshares has been reported on PrefBlog.

Issue Comments

ASC.PR.A Downgraded to Pfd-2(low) by DBRS

DBRS has announced:

has today downgraded the Preferred Shares issued by AIC Global Financial Split Corp. (the Company) to Pfd-2 (low) from Pfd-2 (high) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In 2004, the Company issued 1.6 million Preferred Shares at $10 each and 1.6 million of Class A Shares at $15 each. The initial structure provided downside protection of approximately 58% (net of expenses).

The net proceeds from the offering were invested in a portfolio (the Portfolio) that included common equities selected from leading bank-based, insurance-based and investment management–based financial services companies with strong credit ratings. The Portfolio is actively managed by AIC Investment Services (the Manager) to invest in companies that have at least a US$1 billion market capitalization. The weighted-average credit rating of the Portfolio will be at least equivalent to “A” at all times. To mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation, it is expected that a minimum of 90% of all foreign content will be hedged back to the Canadian dollar for the life of the transaction.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the net asset value (NAV) of the Portfolio is less than $15 after giving effect to such distributions. Since the NAV has been greater than $15 since inception, the Class A Shareholders have received a consistent dividend on their investment. As a result, the Company requires greater returns from capital appreciation to maintain the current NAV of the Company.

In December 2006, when the Preferred Shares were upgraded to Pfd-2 (high), the NAV was $27.50, providing downside protection of about 64%. Since then, the NAV has declined 33% to $18.45, and the current downside protection available to the Preferred Shares is approximately 46%. The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry.

The downgrade of the Preferred Shares is based on the reduced asset coverage available to cover repayment of principal.

The redemption date for both classes of shares issued is May 31, 2011.

The mass review of Financial Split-Shares was discussed on Prefblog on March 19. The 2-notch downgrade of this issue – with asset coverage of 1.8+:1 and only 3 years (and a bit) to maturity signals a new get-tough attitude by DBRS.

ASC.PR.A is tracked by HIMIPref™; it was removed from the SplitShares index at the end of April 2007, due to volume concerns. It had been upgraded to Pfd-2(high) in late 2006.

Index Construction / Reporting

Home-made Indices with Intra-Day Updating

Assiduous Reader kaspu has complained about the volatility of the S&P/TSX Preferred Share Index (TXPR on Bloomberg) – or, at least, the reported volatility.

The problem is that this index is based on actual trades; hence, it can bounce around a lot when 100 shares trade at the ask, $1 above the bid. For instance, today:

This sort of behaviour is endemic to indices created by small shops without much market knowledge or experience. Readers in need of indices with more precision may wish to use the HIMIPref™ Indices, which are, of course, based on much less volatile bid prices.

“Gummy” has announced a new spreadsheet, available from his website. This spreadsheet allows the download of bid and ask prices – and lots of other information – for stocks reported (with a 20 minute delay) by Yahoo. It strikes me that with minimal effort, one could reproduce TXPR (using the defined basket of CPD) and update the index at the touch of a button, with minimal set-up time required.

The Gummy Stuff website, by the way, is reliable AS FAR AS IT GOES. Dr. Ponzo is math-oriented to a much greater degree than investment-oriented and does not always respect hallowed fixed income market conventions. In other words, I have found that things are properly calculated in accordance with the (usually stated) assumptions, but these assumptions are not necessarily the ones I might make when performing a calculation with the same purpose.

With respect to Kaspu‘s question about other indices … the latest CPD literature references the “Desjardins Preferred Share Universe Index”, which is new to me … and I have no further information. Claymore may be preparing for a showdown with the TSX about licensing fees (you should find out what they want for DEX bond data … it’s a scandal).

Additionally, there is the BMO Capital Markets “50” index, but that is available only to Nesbitt clients … maybe at a library, if you have a really good one nearby that gets their preferred share reports.

Update, 2008-5-1: “Gummy” has announced a spreadsheet that does exactly this! Just watch out for dividend ex-Dates!

Miscellaneous News

TD Securities Analysis Link Added to Blogroll

I’ve made a few additions to the blogroll lately – usually I don’t mention them – and there’s one that needs to be explained.

I’ve added TD Securities Public Currency and Research to the list, largely in the hopes that more of this research will be made public.

Read it, don’t read it, your choice, but remember the basic rules about dealer research:

  • The data is excellent
  • The ideas are interesting
  • The actual value of specific trade recommendations is dubious

I’ve also added a link to the Gummy Stuff website, which contains a plethora of utilities that are very useful for retail investors.

Issue Comments

NA.PR.M Settles Slightly Below Par

The new issue of National Bank 6.00% Perpetuals, announced March 31 and reported to have experienced brisk demand settled today, trading 412,080 shares in a range of 24.80-95, closing at 24.86-93, 10×25.

I have not seen an announcement regarding the greenshoe, but this is exercisable for 30 days after closing. The TSX website reflects the advertised 6-million-share ($150-million) size of the offering.

Comparables at the close are:

NA.PR.M and Comparables, 4/16
Issue Quote Dividend YTW CurvePrice
NA.PR.K 24.66-78 1.4625 5.93% 24.82
NA.PR.L 20.92-30 1.2125 5.80% 21.66
NA.PR.M 24.86-93 1.50 6.07% 25.44
BMO.PR.L 24.75-77 1.45 5.91% 25.33
Miscellaneous News

Giant JPMorgan Preferred Issue in the States

In news certain to make Assiduous Reader madequota (who hates new issues) glad that he’s north of the border, JPM has come out with a $6-billion fixed-floater:

The non-cumulative securities priced to yield 419 basis points more than U.S. Treasuries due in 2018 and pay a fixed rate of 7.9 percent for 10 years. If not called, the debt will begin to float at 347 basis points more than the three-month London interbank offered rate, a borrowing benchmark, currently set at 2.73 percent. A basis point is 0.01 percentage point.
…
Writedowns have reduced JPMorgan’s Tier 1 capital ratio, which regulators monitor to assess a bank’s ability to absorb loan losses, to 8.3 percent from 8.4 percent. That compares with ratios of 7.5 percent at Wachovia Corp. and 7.1 percent at Citigroup Inc. as of Dec. 31.

The minimum for a “well-capitalized” rating from regulators is 6 percent. The assets are calculated by weighing each type relative to its chance of default
…
Lehman Brothers Holdings Inc., the fourth-largest securities firm, sold $4 billion of preferred shares on April 1 that pay a coupon of 7.25 percent and are convertible to stock when Lehman shares reach $49.87. Citigroup, which has reported subprime losses of $24 billion and raised more than $30 billion in capital since November, pays 8.13 percent for preferred stock it sold in January. Bank of America Corp. is paying 8 percent on perpetual preferred shares sold the same month.

Market Action

April 16, 2008

The latest report of nefarious skullduggery involves the possibility that banks have under-reported the yields paid on interbank borrowing to avoid looking desperate, resulting in a quote for LIBOR that understates the true rate. Naked Capitalism republishes an extract from the WSJ article; the British Bankers’ Association has threatened to ban any bank caught misquoting rates.

Speaking of the BBA, they have recently released a response to proposals for increased/changed regulation … most of it is UK-specific, but they have strong views on the funding of a central deposit insurer:

We are strongly of the view that a pre-funded deposit protection scheme is inappropriate for UK market. We believe that there should be greater appreciation of the limited ability of deposit protection schemes to save a troubled bank and the impracticality of devising a scheme large enough to cope with the failure of a large UK institution.

We have significant concerns over the competitiveness impacts on the UK financial sector of moving to a pre-funded deposit protection scheme. The costs of moving to a pre-funded scheme would be significant and would have a harmful effect on banks’ competitiveness and their ability to lend to business and individuals alike. The industry has already sustained a significant cost increase from the removal of coinsurance and, subject to further consideration of the issues involved, would be prepared to take on the additional costs of a move to gross payments.

…

We note that in the US scheme, operated by the FDIC, the pre-fund was created for the purposes of closure and/or failure of a large number of small entities operating in that market. It is not set up to resolve problems in a bank the size of Northern Rock nor does the US system necessarily need a pre-fund to operate. Consumer confidence is driven by expectations that money can be retrieved in a crisis. We believe it would be impractical to build up a UK fund of sufficient size to deliver his. The United States ex-ante scheme of $49bn, built up over many years and in relation to circa $4 trillion insured deposits, is approximately equivalent to Northern Rock’s retail deposit base prior to the run. So unless it is a small institution that is in distress there would not be enough in the fund to head off a run.Whilst a pre-funded scheme would provide a ready pool of liquidity in the event of a bank default there are other more efficient means of delivering liquidity for prompt payout.

FDIC insurance is backed by the “full faith and credit of the United States Government”. We believe that a similar arrangement whereby the UK government provides support for an FSCS deposit scheme which borrows funds only when required provides the most effective balance for achieving a credible scheme in the eyes of the consumer whilst minimising costs to the industry.

In an update to my post Is Crony Capitalism Really Returning to America, I confessed to some confusion regarding the rationale for brokerages having such enormous chunks of sub-prime on their books:

Taking the last point a little further, I will highlight my confusion as to why the brokerages are taking such enormous write-downs on sub-prime product. This has never made a lot of sense to me

. The WSJ (via Naked Capitalism) has provided a much more venal rationale than the one I suggested at the time:

In August 2006, one Merrill trader fought back when managers pushed to have the firm retain $975 million of a new $1.5 billion CDO named Octans….

The result was a heated phone conversation with Merrill’s CDO co-chief, Harin De Silva, who was out of the office. Mr. De Silva urged the trader to accept the securities….The alternative was to let the deal fall apart, which would leave Merrill holding the risk of all the securities that would have backed the CDO.

In the end, Mr. Roy’s group took the $975 million of securities on the firm’s books….a step that helped the firm hold its top rank in CDO underwriting and led to an estimated $15 million in fee revenue…

Pressures rose in early 2007 as the housing bubble lost air. Merrill set out to reduce its exposure, in an effort referred to innocuously as “de-risking.”

It could have sold off billions of dollars’ worth of mortgage-backed bonds that it had stockpiled with the intention of packaging them into more CDOs. But with the market for such bonds slipping, Merrill would have had to record losses of $1.5 billion to $3 billion on the bonds, says a person familiar with the matter.

Instead, Merrill tried a different strategy: quickly turn the bonds into more CDOs.

Doing so was no longer a profitable enterprise….Still, executives believed that so long as all they retained on their books were super-senior tranches, they would be shielded from falls in the prices of mortgage securities….

In the first seven months of 2007, Merrill created more than $30 billion in mortgage CDOs, according to Dealogic, keeping Merrill No. 1 in Wall Street underwriting for this type of security.

The call for comments, Financial stability and depositor protection: strengthening the framework. At issue are the following notes regarding UK deposit insurance:

1.48 On 1 October 2007, the FSA changed the FSCS compensation limit applying to deposits so that 100 per cent of an eligible depositor’s losses up to £35,000 are covered. The FSA proposes that this limit will continue to be applied per person per bank, and without any co-insurance below the limit. The FSA intends to consult on a review of the FSCS limits in all sectors and other changes to the compensation scheme. The Authorities will also work with the financial sector to explore alternative ways for individuals to cover amounts above the threshold, as the Treasury Select Committee has recommended.

4.42 The Authorities have considered the possibility of making depositors a preferential class of creditor, (i.e. to introduce depositor preference), but the likely adverse consequences of this for other creditors in insolvency proceedings and for banks generally, in terms of increased costs of credit, shorter loan periods and increased demand for collateral, appear to make this undesirable in the UK context. It is therefore proposed that the claims of the FSCS and depositors (whose claims are not settled by the FSCS) will continue to rank alongside the claims of other ordinary unsecured creditors. While a bank liquidator will have a duty to assist the FSCS to effect a repaid payout (i.e. to process depositor information at an early stage), the funding for any payout to depositors would be provided by the FSCS.

5.53 The Treasury Select Committee has identified two disadvantages of a ‘pay as you go’ approach to financing the FSCS: