West Bromwich Building Society was fighting for survival last night in a last-ditch attempt to secure a debt-for-equity swap with its key bondholders.

There has been speculation for months over the future of the West Midlands-based society, which employs 850 people in 46 branches and has 350,000 customers.

The tripartite authorities – the Treasury, the Bank of England and the Financial Services Authority (FSA) – have been trying for months to find a buyer for the building society, the eighth biggest in the UK. It has also been working on a plan – not previously attempted in the sector – of converting West Brom’s debt into equity.

Because West Brom is owned by its members and does not have shareholders, the debt cannot be converted into conventional equity. But the Government and its advisers have come up with a new form of capital instruments that will act in a similar way to equity, including absorbing losses. The instruments are expected to carry a coupon that will be similar to a dividend by having a payout related to the society’s profits.

Advisers to the Government and to West Brom have been trying for days to thrash out the agreement with bondholders. Those close to the deal said last night that an agreement was virtually certain and that a formal statement was expected imminently.

West Brom is under enormous pressure to produce a deal before Monday, when the society is scheduled to publish its annual results. It was struggling to bring forward its results and to publish them last night, along with details of the debt-for-equity swap.

The embattled society said that it would swap its subordinated debt, totalling £182.5 million, into new instruments that would be similar to equity. It has a £1 billion commercial property loan book and £3 billion in buy-to-let mortgages. It has only £2.6 billion in prime residential mortgages.

The move will boost West Brom’s core Tier 1 capital – a key measure of financial strength – from 7 per cent to more than 12 per cent and should improve its credit rating. It will also increase the size of the pool of capital that absorbs losses from West Brom’s loan book. The change to the capital base will not affect customers, and savers’ money is protected by the Financial Services Compensation Scheme.

Bondholders appear to have agreed to the deal because they feared that, otherwise, the society would have been split up as the Dunfermline Building Society was. In Dunfermline’s case, Nationwide Building Society took on its savings book during an emergency weekend in March and its mortgage loans were left with the Government. Dunfermline’s bondholders are unlikely to recoup anything.

Although the debt-for-equity swap will stabilise West Brom, the tripartite authorities remain eager for the society to be sold. That is likely to involve a break-up, with another mutual or a bank taking its savings book and branches and the Government taking control of the mortgage book under its new Special Resolution Regime.

Coventry Building Society is thought to be potentially interested in West Brom and there has been speculation about Skipton. The Government may also try to persuade a bank to take on some of the business.

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