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US investor boosts B&B finances B&B sees loss in wake of downturn
(2 days later)
One of the world's largest private equity houses is to take a 23% stake in Bradford & Bingley. Losses and a warning of tougher times ahead have sent shares in UK mortgage lender Bradford & Bingley tumbling.
The move by US investor Texas Pacific Group (TPG) will help to boost the finances of the UK's major buy-to-let mortgage lender. Its shares fell 24% after it recorded a £8m pre-tax loss in the first four months of 2008 compared to a £108m profit in the same period last year,
About £179m of funds is to be injected into B&B, with existing stakeholders asked to provide £258m of new capital. B&B blamed problems with buy-to-let mortgages as people struggle to repay loans and said it would sell a 23% stake to Texas Pacific Group for £179m.
Shares in B&B were briefly suspended before the announcement and fell 20% after trading restarted. Chancellor Alistair Darling stressed that depositors' money was safe.
this is a disappointing trading update reflecting a more difficult market environment Rod KentExecutive chairman 'Prudent action'
News of the investment came as B&B announced that its chief executive had stepped down "due to a serious cardiovascular condition". He applauded the lender's action, which also includes a plan to ask existing stakeholders to provide £258m of new capital through a discounted rights issue.
Rod Kent, executive chairman, said: "The last few weeks have been challenging for Bradford & Bingley, and this is a disappointing trading update reflecting a more difficult market environment. I understand shareholders' disappointment." "They are doing exactly what the Bank of England has been encouraging them to, restructuring and strengthening their position so they can go forward," Mr Darling told the BBC.
Lower profits The combination of the rights issue and the investment by private equity business Texas Pacific will raise about £400m in capital.
B&B said it made a pre-tax loss of £8m in the first four months of the year due the falling value of property-related investments and other charges. It has suffered further charges on its so-called structured finance portfolio, or its foolish investments linked to US subprime Robert PestonBBC Business Editor class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/06/bbs_rising_arrears.html">Robert Peston's blog class="" href="/1/hi/business/7431044.stm">Business model under scrutiny class="" href="/1/hi/business/7430916.stm"> Q&A: Troubles at top lender
As the UK economic slowdown takes hold, customers are increasingly having problems replaying their loans. Britain's biggest buy-to-let lender needs to shore up its finances now that the UK economic climate has deteriorated further and a global credit crunch is restricting borrowing for consumers and lenders.
The lender said the number of people who are more than three months behind with their mortgage payments has jumped from 1.63% to 2.16% over the past four months. BBC Business Editor Robert Peston said: "Lending remains under pressure because, like all banks, the cost of raising money for Bradford & Bingley remains high.
Bradford & Bingley is the UK's eighth-largest bank and the biggest in the buy-to-let market. "It has suffered further charges on its so-called structured finance portfolio, or its foolish investments linked to US sub-prime."
The former building society has more than three million customers. The sluggish economy is also hurting consumers, forcing more people to fall behind with mortgage repayments.
Bradford & Bingley has a trading problem, but it doesn't have the kind of problems Northern Rock had Robert PestonBBC Business Editor class="" href="http://www.bbc.co.uk/blogs/thereporters/robertpeston/">Robert Peston's blog B&B said the percentage of customers who are more than three months behind with payments or who have had their homes repossessed had risen from 1.63% to 2.16% over the past four months.
But the firm has been hit hard by the credit crisis, and in May launched a rights issue asking current shareholders to inject £300m. This is far worse than the industry average of just 1.1% in the second half of last year. Advertisement
The new plan represents a scaling back of that demand, but because of TPG's contribution, B&B will end up raising more than under the previous plan - about £400m in total. Buy-to-let landlord Fergus Wilson gives his advice
The price of new shares for TPG and for B&B's existing shareholders is well below the original rights issue price of 82p per share. The buy-to-let market - which accounts for 60% of the group's total lending - has proved particularly tricky.
BBC Business Editor Robert Peston said: "The reason it needs all this money is because its profits are going to be lower this year than the City had expected. Cash call
"The City was expecting about £250m of profits this year. Unfortunately because of the downturn in the housing market, Bradford & Bingley is probably only going to make about £150m. The call for cash from investors is something of a U-turn for B&B after it denied reports earlier this year that it was planning to raise funds through a rights issue.
"That's a big drop - but nonetheless note, it is still likely to be in profit." It's raising capital from the private market which is much better than running to the government like Northern Rock Vince CableLiberal Democrat Treasury spokesman
One problem for Bradford & Bingley is that the housing market downturn has knocked the profits it makes from buy-to-let mortgages. Shareholders will now be offered shares at 55p rather than 82p under initial plans outlined several weeks ago.
"B&B is now asking less of existing shareholders in terms of a right issue," said Richard Hunter, an analyst at Hargreaves Lansdown.
"The question you have to ask yourself is: if I had £500 to invest, would I invest it in B&B?" he added.
But experts believe B&B's troubles are not as severe as those of Northern Rock and the City watchdog, the Financial Services Authority, has said B&B's shareholders, not its savers, will feel the pain.
Liberal Democrat Treasury spokesman Vince Cable told the BBC: "It is raising capital from the private market which is much better than running to the government like Northern Rock."
Shares in B&B were briefly suspended before the trading statement was released.
When trading restarted they fell sharply and closed down 24% at 67p. The shares have fallen by more than two-thirds in just the past six months.
WHAT IS A RIGHTS ISSUE? Companies issue extra shares to raise money They are offered to existing shareholders, usually at a discount to the current share priceShares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones Check Bradford & Bingley sharesCheck other banking sharesWHAT IS A RIGHTS ISSUE? Companies issue extra shares to raise money They are offered to existing shareholders, usually at a discount to the current share priceShares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones Check Bradford & Bingley sharesCheck other banking shares
The buy-to-let market in the UK is worth about £120bn, with B&B having about a fifth of that. Shares in other lenders fell on fears about the health of mortgage industry. HBOS fell 10% while Alliance & Leicester was down more than 5%.
The lenders' profits have been hit by a rise in the number of its borrowers who are experiencing difficulties making repayments on mortgages. HBOS shares were hammered despite it issuing a statement saying that its own planned rights issue was fully underwritten and was going to plan.
A further squeeze on profits has come from a narrowing in the gap between the interest rate it pays for funds and the rate it receives from borrowers. B&B also confirmed on Monday that its chief executive, Steven Crawshaw, had stepped down due to health problems.
Its share price has fallen by more than two-thirds in just the last six months - and fell 40% in the last month alone. Executive chairman Rod Kent said he understood shareholders' frustration with the lender's current predicament. "This is a disappointing trading update reflecting a more difficult market environment," he said.
But bankers and regulators say B&B's troubles are not comparable in gravity or complexity to those of Northern Rock.
Robert Peston says "people will draw parallels with Northern Rock, but I think those are the wrong parallels".
He said he had spoken to regulators who said B&B had a trading problem, "but it doesn't have the kind of problems Northern Rock had, namely it doesn't have a problem raising vital finances to keep going."
Also, he said, TPG has a fearsome track record as an investor.
"And the news that it is taking a substantial stake... may reassure the stock market that the worst could be behind B&B."
Are you affected by the issues in this story? Are you a B&B stakeholder? Do you have a buy-to-let mortgage or have you been trying to fix a mortgage deal? Send us your comments.
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