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Bradford & Bingley Boosts Rights Issue

Reuters
Friday, 4 Jul 2008 | 2:00 PM ET

Bradford & Bingley on Friday increased its rights issue to 400 million pounds ($794 million) after U.S. investor TPG Capital pulled out of buying a stake as concern deepened about the UK bank's business plan.

Private equity firm TPG withdrew after ratings agency Moody's cut B&B's debt ratings, triggering a clause allowing TPG to scrap the agreement, B&B said on Friday.

That prompted Britain's financial watchdog to step in, keen to avoid another bank running into trouble like Northern Rock last year, and B&B's top investors backed the new rescue plan.

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Moody's downgrade cited a "substantial deterioration" in asset quality and the threat this will get worse.

B&B is Britain's biggest buy-to-let lender and has seen losses on bad debts rise as house prices fall and the economy stutters.

It had planned to sell TPG a 23 percent stake for 179 million pounds and raise 258 million through a rights issue.

It will now seek a net 400 million pounds through the rights issue.

B&B said under the enlarged rights issue it proposed issuing around 828 million new shares -- some 57 percent of the enlarged share capital -- and would offer shareholders 67 new shares for every 50 existing ones.

Its shares closed down 18 percent at 50 pence, after hitting an all-time low of 48p, below their rights issue price of 55p.

The bank has not changed the subscription price for the enlarged offer.

"We wrote about this company several months ago, that it could be Northern Rock in slow motion. It looks like things may be moving a bit faster than that now," said Leigh Goodwin, analyst at Fox-Pitt Kelton.

"The company doesn't have a viable business model right now," he said, suggesting shareholders could end up with little and the bank could be losing money as early as next year.

"Bad debts on the mortgage side are going up and funding costs are also going to go up now," Goodwin added.

B&B said several of its biggest shareholders were supporting the enlarged rights issue, and named Standard Life, Prudential's M&G, Legal & General and HBOS's Insight as backers.

They own a combined 13 percent and are expected to sign up for their rights and could help mop up leftover shares.

Citi and UBS will still underwrite the rights issue. There is a growing risk that much of the cash call will be left with the underwriters.

Retail investors own about 40 percent of B&B's shares, and they are typically less likely to take up their rights, especially with the shares near the offer price and UK household finances under strain.

Shareholders had been due to vote on the TPG investment and rights issue plan on Monday, but the bank said the meeting would be adjourned, probably until the week of July 14.

Third Time Lucky?

The bank is in need of cash after a slump in the UK housing market.

But B&B's emergency fundraising plans have been in turmoil, prompting criticism of Executive Chairman Rod Kent's handling of the crisis.

The lender was forced to slash the price of a rights issue and bring in TPG a month ago after issuing a stark warning about the shape of the mortgage market and defaults on loans.

Entrepreneur Clive Cowdery tried to gatecrash the TPG deal with his own plan to inject 400 million pounds into B&B, but walked away last week, saying the lender's refusal to open its books made a deal impossible. It had proposed to buy shares at 72p each.

Cowdery is unlikely to return for B&B as it no longer fits his plan to consolidate several UK lenders into a bigger bank with a AA credit rating, a person familiar with the matter said.

A spokesman for the Financial Services Authority said it had been in talks with "all the market participants" in regard to the fundraising, but declined to say how involved it had been.

Moody's said that in addition to its concerns about asset quality it was also conserned about B&B's obligation to buy 350 million pounds of mortgages from GMAC each quarter, and the potential for more writedowns on risky assets.

The cost of insuring B&B's debt jumped. Five-year senior credit default swaps were 100 basis points wider at 375 bps, a trader said.

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