What next for Bradford & Bingley?
The news that Bradford & Bingley's profits have taken nearly a 50% hit in the first four months of 2008 may have set alarm bells ringing for many people. After all, it wasn't that long ago that we all witnessed the run on Northern Rock that resulted in its nationalisation.
What has actually happened?
Bradford & Bingley's profits for the first four months of 2008 were £56 million - compared to £108 million in 2007. This fall of nearly 50% is largely the result of the credit crunch, which has not only made lending more expensive for banks but also reduced the amount of lending banks are willing to do.
In order to improve its capital position, Bradford & Bingley plans to raise additional capital of £400 million - £258 million through a rights issue and £179 million from Texas Pacific Group (TPG), a US private equity investment firm that has bought a 23% stake in the business.
However, in July TPG pulled out of the deal, leaving Bradford & Bingley with little choice but to raise the full £400 million through shareholders.
As part of the rights issue, all shares will be issued at an offer price of 55p per share.
All well has having seen its profits dented, Bradford & Bingley has also reported an alarming rise in the percentage of its mortgages that are three months or more in arrears, from 1.63% at the end of last year to 2.16%.
One of the reasons for the rise is a mortgage book Bradford & Bingley bought off another buy-to-let lender, GMAC. It says the book has produced “higher than expected arrears”.
Although Bradford & Bingley says it has already cut back its purchases from GMAC, it is committed to buying around £2.1 billion of GMAC mortgages by the end of next year.
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.
What does it mean for customers?
As explained above, there is no suggestion that Bradford & Bingley will suffer a similar fate to Northern Rock, and there is no need to panic.
If you are a borrower with Bradford & Bingley then the advice is to continue to meet your repayments in full and on time.
If you are a saver with Bradford & Bingley, then the same applies. All retail deposits with British regulated banks are protected by the Financial Services Compensation Scheme (FSCS) – this means that should a bank go bust, the first £35,000 of your savings is covered.
Savers only face losing their money if they have more than £35,000 in an account.
If you do have more than £35,000 to save and want to ensure all your funds are covered by a deposit-protection scheme, then you should consider opening another competitive account and transferring anything over £35,000 across.
What about investors?
Bradford & Bingley’s share price took a dive after the announcement – falling by 30% at one point during 2 June.
At the time, the advice from The Share Centre was to avoid any rash action.
Graham Spooner, investment adviser at The Share Centre, said: “Although it does reflect the dire state of the buy-to-let market we do not think this is another Northern Rock situation.
“[The 30% fall in share price] along with the relatively small discount on offer to investors in the rights issue - new shares at 55p and ordinary shares at 64p - leads us to continue to be negative about Bradford & Bingley for the short-term at least, and we urge investors to wait until the last minute before making their decision to act on the rights issue in the hope that the share price will settle down.”
Many investors are unhappy with the way Bradford & Bingley has communicated its issues. At one point it flat denied a rights issue was on the horizon, later admitting a £300 million one was in the pipeline.
Then, on 2 June, it restructured the deal, instead planning to raise £258 million from existing investors and unveiled the offer from TPG to take a 23% stake in the business, thus becoming its largest shareholder.
Unsurprisingly, many retail investors are confused, while institutional investors are unhappy about the lender agreeing the deal with TPG without offering them first refusal.
However, the deal with TPG should send a signal of confidence to investors. The US private equity firm is known to be picky about where is invests its cash, and it has stated it sees an opportunity for Bradford & Bingley in the future.
This vote of confidence might convince some investors to buy up Bradford & Bingley shares – especially as these have fallen in price since the deal was announced. However, this approach is probably for those investors prepared to take a risk as the share price could fall further, and broker sentiment is still to “sell” Bradford & Bingley, according to Hemscott.
The outlook for the housing market still looks uncertain, and it is possible that mortgage lenders like Bradford & Bingley face a rocky road ahead.
Tim Steer, manager of the New Star UK Alpha Fund, says that while banks look cheap, the credit crunch is not over yet.
"The Bradford & Bingley news is an example in point, here's a business that's suffering not because of sub-prime fallout but because trading is poor in the UK," he adds. "This helps to illustrate the point that a little scrutiny can go a long way in the current market conditions. The FTSE All Share is down around 7% so far this year, whilst the FTSE 100 has fallen by around 1% in the last year - not a great deal in other words."
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.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
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.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
“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.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).