Bradford & Bingley and the City

04 June 2008 / by Rebecca Sargent
Bradford & Bingley stands accused of damaging the reputation of the City of London following its shameless rights issue renegotiations which were announced on Monday.

As a result, it has been reported that the Association of British Insurers (ABI) is due to investigate whether the banks sale of new shares to Texas Pacific Group (TPG) has breached pre-emption rights rules, which give existing shareholders first refusal rights.

In what has been described as 'little short of a disgrace', mortgage specialist, Bradford & Bingley has shunned its prearranged £300million rights issue in favour of a 23 per cent stake share to TPG at a reduced rate of 55p per share, and a smaller cash call to shareholders, which is expected to raise more than £400million in total.

According to experts, the move that has left the City and B&B shareholders fuming came as a result of pressure from the Financial Service Authority (FSA) for the bank to write down the value of its assets. Consequently, the banks share price fell from a strong position to all time lows of around 60p which has forced the bank to renegotiate its rights issue as its underwriters, UBS and Citigroup threatened to shirk responsibility.

As speculation rises over the prospect of Bradford & Bingley becoming the next Northern Rock, Graham Spooner, investment advisor at the Share Centre advised investors to think carefully before taking any action, saying:

"B&B has without a doubt been among those worst hit by the credit crunch, having traditionally taken a higher proportion of its funding from wholesale money markets as opposed to individual savers.

"This poor performance, along with the relatively small discount to investors in the rights issue leads us to continue to be negative about B&B 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." He added.

The stability of the buy-to-let mortgage market has also come into question as a result of B&B's news on Monday and its severe profit warning. However, experts argue that the housing market in general has seen nothing but doom and gloom so far this year as a result of the credit crisis.

Tim Steer of New Star said: "Some well known market commentators may have been telling us that the worst of the credit crunch is over and things are looking up for financials, but this does not apply to all financial stocks.

"The Bradford & Bingley news on Monday is an example in point, here's a business that's suffering not because of a sub-prime fallout but because trading is poor in the UK. This helps to illustrate the point that a little scrutiny can go a long way in the current market conditions."

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