Bradford & Bingley share price could harm rights issue hopes

20 May 2008 / by Joy Tibbs
There are increasing concerns that Bradford and Bingley's falling share price could jeopardise its ambitions as one of several finance groups looking to strengthen its balance sheet by means of a rights issue.

The buy-to-let mortgage specialist, which until recently claimed it would not need to raise funds through a rights issue, said on May 14 that it will appeal to shareholders for £300million.

But B&B's share price has fallen a staggering 70 per cent in the last year and has experienced recent declines, falling from 135p on May 16 at 8am to 111p at the same time on May 20.

Consequentially, it is feared that shareholders may be reluctant to take up its offer of buying 16 new shares for every existing 25 shares at a cut price of 82p each. If shares were to drop a further 20 per cent before the July deadline, the rights issue could be threatened.

When the cash call was issued, chief executive, Steven Crawshaw, suggested that it would be a positive step for the bank. He said that "The improved financial strength will ensure we are even better placed to pursue our strategy of providing high quality savings and mortgage products in a competitive market."

But critics have pointed out that problems within the UK housing market, and falling house prices in particular, could have serious implications for the bank. Rising mortgage costs could also influence the buy-to-let mortgage market, particularly for landlords approaching the end of reasonably priced fixed-rate mortgage deals.

According to thisismoney.co.uk, the percentage of Bradford & Bingley's mortgage book that was at least three months in arrears was 1.63 per cent as of December 2007 – before the real impact of the credit crunch was felt – up from 1.30 per cent in 2006, both well above the industry average.

B&B surprised industry experts back in December, when it emerged as a potential bidder for Northern Rock. Now parallels between the two mortgage lenders are being drawn as, like the now nationalised bank, Bradford & Bingley increased lending levels shortly before the market started to deteriorate.

Meanwhile, the Government is reportedly seeking a valuer to decide how much Northern Rock shares are worth, Many companies have appeared reluctant to take on the task, which is destined unlikely to appease either Government ministers or the bank's shareholders.

While shareholders are still pursuing legal action against the Government over its treatment of the Northern Rock situation, many financial groups are determined to avoid getting involved in the valuation process altogether.

©Fair Investment Company Ltd