B&B Warns on UK Mort. Market as TPG Buys Stake
Bradford & Bingley issued a stark warning on the state of the UK mortgage market on Monday and slashed the price of its emergency fundraising to secure a private equity lifeline, hitting bank shares across Europe.
In the bleakest outlook yet from a British lender -- weeks after it last spoke to investors -- B&B said it had tumbled to a loss for the first four months of the year and saw continued pressure on margins as funding costs remain high and the risk of customers defaulting on loans rises faster than expected.
The bank blamed a sharp deterioration in April and that was backed on Monday by official data which showed new home loan approvals in Britain fell to a new record low that month.
B&B's shares, which have already lost almost two-thirds of their value over the past year, slumped a further 32 percent to a record low of 60 pence.
The pain spread to banking shares across Europe, as dealers said B&B's troubles showed even cut-price rights issues could fail amid a lukewarm appetite to invest more after a torrid year for the sector.
Royal Bank of Scotland and HBOS, which also plan bumper rights issues, put out statements to say they continued to trade in line with their previous guidance.
B&B also announced plans for an outside lifeline as U.S. private equity firm TPG Capital -- also known as Texas Pacific -- agreed to take a 23 percent stake in the bank in its first major UK bank investment.
It will invest around 179 million pounds ($353 million) to become the single largest investor in Britain's biggest buy-to-let lender.
The private equity group's surprise swoop mirrors moves by strategic investors to shore up U.S. banks as financial institutions across the world have struggled with writedowns, the impact of the credit crunch and the prospect of recession.
TPG has positioned itself since the start of the crunch as a potential saviour for banks hit by subprime losses, striking a deal in April with U.S. bank Washington Mutual <WM.N>.
Monday's deal with TPG will add to B&B's planned cash call, announced last month but now trimmed to 258 million pounds, as the bank slashed the price in the face of the worsening outlook.
It will now raise a total of 400 million pounds, net of expenses.
The bank also announced the highly unusual step of slashing its rights issue price to 55p, down from an initially planned 82p price for the 19-for-25 issue as its shares threatened to go "underwater", or dip below the already discounted level.
"We think the consequences of having an underwater rights issue are not in the best interests of shareholders," Rod Kent, the bank's executive chairman, told analysts.
"You would have had a troubled market after the rights issue closed, with an overhang left with the underwriters," he added.
But the move came in for stinging criticism as analysts said the bank had let underwriters Citi and UBS off the hook and struck a deal that damaged its investors.
"It is true that TPG's investment brings some support to the rights issue, but this is at the expense of existing shareholders," analyst Mamoun Tazi at MF Global said.
Goldman Sachs advised B&B in its placement of shares with TPG and the restructuring of the rights issue.
B&B shares closed 24.1 percent lower at 67.00p.
At this price, B&B is worth around 406 million pounds -- a fraction of its 3.3 billion value at its peak in March 2006.
HBOS -- the second-largest buy-to-let lender and the next in line with a rights issue after B&B -- fell 10 percent to top FTSE-100 losers and Alliance & Leicester shed 5.2 percent.
B&B's unscheduled trading update gave no specific outlook for its 2008 headline profit, but it warned of weak margins and said writedowns on assets battered by the credit crunch had dragged it to a pre-tax loss of 8 million pounds in the first four months of 2008.
Underlying profits halved to 56 million.
It also said it expected deteriorating trends seen in the first four months of the year to continue.
In an alarming sign for UK mortgage lenders, it said arrears were rising and margins were set to be hit by higher funding costs, a drop in mortgage redemptions -- which meant the bank was unable to pass on those costs -- and by increased competition for retail savings.
It said its underlying net interest margin in the first four months was 0.98 percent from 1.16 percent a year ago.
The margin for the whole of 2008 will be between 0.90 and 0.95 percent.
The bank said arrears, an indication of possible future defaults, jumped in April, particularly for mortgages recently acquired from GMAC.
It also said it had uncovered mortgage fraud which cost the bank some 15 million pounds.
Kent, who has taken the executive reins after the departure of CEO Steven Crawshaw on Sunday, said the acceleration in bad debts had only become visible in April numbers, available to the board in May -- after the initial rights issue was announced.
"Management's previous claims that buy-to-let would remain higher-quality lending than the mainstream now appear very naive," analyst Alex Potter at Collins Stewart said.
B&B has been under pressure since it surprised investors in May with news of an emergency rights issue, a month after saying it had no plans to do so.
It said at the time it had waited for markets to stabilise before going ahead with the cash call.