Battered & Bingley hits investors in the pocket

Four weeks after telling us it didn't need more cash, Bradford & Bingley is launching a £300m rights issue.

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Last Updated: 31 Aug 2010

Bradford & Bingley said this morning that it plans to tap its shareholders for extra cash to shore up its balance sheet, which has taken a bit of battering from the bank’s credit crunch-related losses. Under the terms of the rights issue, investors will be offered 16 shares for every 25 they currently own, at a discount of nearly 50% to its previous share price – raising a total of about £300m. Shareholders were so pleased that the bank’s share prices was down 10% when the market opened…

B&B’s CEO Steven Crawshaw said the rights issue would raise the bank’s capital ratio – the sign of its financial strength – to about 10%, which is relatively high by banking standards. The move would ‘strengthen our financial standing, reinforcing our position as one of the better capitalised banks in the UK,’ he said.

This is all well and good – but it represents a fairly embarrassing U-turn by B&B. Last month it hotly denied that it needed to ask for more cash, insisting that it had plenty in the coffers for the next year. ‘A month makes a big difference,’ was Crawshaw’s pithy explanation to journalists today. And after losing another £13m on its sub-prime investments last month (to add to the £262m it’s already frittered away), it’s clearly decided that now is the time to act.

The problem for B&B is that the market doesn’t seem convinced that this rights issue will be a panacea, even if shareholders approve the rights issue. Like Northern Rock, B&B has been heavily reliant on the wholesale markets for funding – which are still pretty jammed up. But even more of a worry is the bank’s big exposure to buy-to-let mortgage lending in the UK. If the housing market slows down as much as people seem to think it will (as Housing Minister Caroline Flint inadvertently emphasised yesterday), this part of the market might get seriously squeezed – and B&B is likely to be the biggest loser.

On the other hand, it’s a move that the Treasury has been pushing all the banks to make – and with RBS and HBOS already tapping investors for a combined £16bn, the precedent is there. It might be expensive for shareholders, but rather this than another Rock-style phone call to the lender of last resort...

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