Things go from bad to worse at Bradford & Bingley as its latest fundraising is rescued at the last minute by the FSA.
The rights issue at Bradford & Bingley (LSE: BB) is turning into a depressing soap opera storyline that would be worthy of EastEnders.
Here’s a quick recap of events so far. Back in mid-May B&B, with its shares at about 150p, finally admitted it needed to raise new money and launched a £325m rights issue at 82p in order to prop up its balance sheet. Less than three weeks later, its trading has deteriorated to such an extent it requires an extra £110m. The rights issue price is lowered to 55p and a US buyout group, TPG Capital, agrees to buy a 23% stake in the company to raise the additional funds required.
Another three weeks pass and B&B discloses that it is rejecting an effective takeover offer from Resolution, although terms of this deal are not revealed. Roll forward two weeks to today and with one business day to go before the rights issue and TPG deal are to be ratified, the buyout group walks away due to a get-out clause triggered by a downgrade in B&B’s credit rating.
Luckily for B&B, the FSA has strong armed a group of investors to take TPG’s place and it’s the same group that were backing the Resolution offer a few weeks before! The rights issue price remains at 55p and it continues to be fully underwritten but the shareholder vote to approve the transaction is pushed back a week to 14 July.
Predictably B&B’s share price slumped on this news. At one point they touched 52p, falling below the rights issue price for the first time. This also means B&B has joined the 90% club - its shares have now fallen by 90% since their peak back in 2006.
Private Shareholders
How many shares B&B one million or so private shareholders will be offered is yet to be revealed. The original rights issue was 16 for every 25 held but revised one increased this to 19 for every 25. The vast majority of B&B’s investors own less than 250 shares and so taking up their rights will probably cost them no more than £100.
To be frank, I’m not sure this latest news really changes things that much for shareholders. Yes, it damages management’s credibility but they had next to none left anyway and probably won’t be in charge for much longer.
The downgrade in the credit rating is hardly unexpected either. A few years ago, credit rating agencies were seen as far more thorough and forward-looking than equity analysts when it came to appraising a company’s prospects. But this is no longer the case and this downgrade appears to be a case of bolting the stable door a year after the horse has departed. It will make it slightly more expensive for B&B to fund its operations however.
The replacement of TPG with another group of investors is also of little consequence. TPG would have been keen to accept a takeover offer but then given the way the FSA has reportedly ‘encouraged’ the new group of investors to take part they’ll be looking for a swift exit too.
B&B will shortly issue a supplementary prospectus with details of the third version of its rights issue. Whether it will contain another trading update remains to be seen. The last one covered the first four months of the year but the figures for May will certainly be known by now and B&B will also have a good idea about June.
In its last update, B&B revealed that just over £1.1bn of its £41bn mortgage book was in arrears of 3 months or greater or undergoing repossession. This was a 37% increase on the figure from just four months previously. This, and a write-down on its sub-prime investments, pushed the group into a small loss.
While B&B is often seen as a casualty of the buy-to-let market the damage has really come from self-certified loans and the £8bn of mortgages it has acquired from elsewhere. Arrears on the latter were recently running at a teeth-curling 5%.
B&B is certainly not out of the woods yet. If its trading begins to stabilise the shares could make a gradual recovery over time. That’s far from certain however and I suspect the most likely outcome is that B&B will be taken over, not necessarily at a price much further north than today.
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