Bradford & Bingley announcement sparks share plunge
Bradford & Bingley's profit warning yesterday sparked a day of losses for Britain's biggest banks, with billions of pounds wiped off their value during the morning and afternoon trading.
At 8.00am on 2 June, Bradford & Bingley temporarily suspended share trading prior to its announcement of a 50% fall in profit and surprise revealation of a new American investor coming on board with a 23% stake in the business.
Texas Pacific Group (TPG), a US private equity firm, has agreed to pump £179 million into Bradford & Bingley – a move that will make it the lender’s largest shareholder. The investment, along with the mortgage lender's £258 million rights issue, will see it raise £400 million in additional capital.
The lender's share price fell by 25% in the hours after share trading was resumed - with other UK banking giants suffering a similar fate.
HBOS saw its shares plunge the most, with a fall of nearly 10%. However, Royal Bank of Scotland, Barclays and Alliance & Leicester also saw the value of their shares reduce as investors took stock of the news.
News in brief
- Bradford & Bingley will raise additional capital of £400 million - £258 million through a rights issue and £179 million from TPG’s investment.
- All shares will be issued at an offer price of 55p per share.
- Underlying profits for the first four months of 2008 were £56 million compared to £108 million in 2007.
- The percentage of mortgages three months or more in arrears has increased to 2.16% of Bradford & Bingley’s total mortgage book, from 1.63% at the end of last year.
- Bradford & Bingley’s group chief executive, Steven Crawshaw, has stepped down as a result of a serious illness, and will be replaced by chairman Rod Kent.
- Bradford & Bingley reports an increase in retail deposits such as savings accounts, with inflows of £2 billion to the end of May 2008.
Is this another Northern Rock?
Unlike Northern Rock – which was forced to ask the Bank of England for emergency funding to support its business model – Bradford & Bingley is making moves to strengthen its capital position to ensure its finances are healthy enough to withstand what looks set to be a tough year for mortgage lenders.
The advice to borrowers and savers with Bradford & Bingley is not to panic. Many of the big banks are also doing rights issues to obtain additional funding from their shareholders.
In addition, the news that an American investor is prepared to put money into the business is a good sign for Bradford & Bingley’s future.
Matthias Calice, a partner at TPG, says: “We believe that [Bradford & Bingley’s] superior market position, coupled with this injection of capital provides the platform for potential growth and profitability.”
How did this happen?
Bradford & Bingley is the UK’s biggest buy-to-let mortgage lender, claiming around a fifth of this £120 billion market. However, the credit crunch and downturn in the housing market has had a severe impact on buy-to-let investors – meaning lending opportunities have also been restricted.
Many landlords have been struggling to secure finance for new purchases while others have found that increased mortgage rates mean the rents they charge do not cover their outgoings.
In addition to the squeeze on buy-to-let lending, Bradford & Bingley has, like other lenders, had to cope with the increased cost of funding. This has not only restricted the amount of lending it is able to do but has also reduced the profit margin on new mortgages.
Another factor hitting Bradford & BIngley is a rise in the number of borrowers failing to pay their mortgages. However, as it points out in its financial results, this is not necessarily a sign of lax lending on its part.
It says the arrears performance of “organically originated” mortgages, particularly buy-to-let, have proved substantially better than acquired mortgages.
However, a mortgage book is acquired from another large buy-to-let lender – GMAC-RFC – has products higher than expected arrears.
Bradford & Bingley says it has already cut back its purchases from GMAC-RFC.
And, like other lenders, Bradford & Bingley has not been immune to the rise in mortgage fraud. It has had to set aside £15 million to cover this type of organised crime although it says it may be able to cover losses through its insurance policy.
As a result of the credit crunch, the lender says it is taking a more prudent approach to lending. This includes demanding bigger deposits from mortgage borrowers and putting more effort into ensuring borrowers pay back their debt.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.