We’ve now had time for a proper read of Bradford & Bingley’s statement on Monday. Here’s a few observations.
Pricey business this restructuring lark. B&B will raise a total of about £400m, net of expenses. But what with £179m coming from TPG and £258m from the restructured rights issue, this suggests that someone is taking about £37m out of the this deal in terms of fees. Bonanza time for the investment banks then. And we can’t help but notice that Goldman Sachs has got in on this honeypot, advising B&B in getting TPG on board. Maybe that jacked up the fee bill - and lucky Goldman aren’t even on risk for the newly discounted rights. UBS and Citi have that distinction.
Contrary to some reports on Monday, the rights issue has been reduced, not increased. The rights goes from £300m net, to about £258m gross. We’d guesstimate that the costs in the TPG part of the deal are about £29m, with £10m coming out of the rights. TPG come in through two tranches, taking 5 per cent of the company at 55p. A second deal to take a further 21 per cent requires shareholder approval at an EGM in mid July. Overall, TPG ends up with 23 per cent of the enlarged company.
And it’s double or bust for investors. They vote to let TPG in, with a 12 month lock-up, protection against dilution and the right to appoint two non-execs, or they vote down the bulk of the fund-raising.
If shareholders do not approve all of the resolutions at the Extraordinary General Meeting, neither the Restructured Rights Issue nor the second tranche of TPG’s subscription will proceed. However, TPG shall retain the right to subscribe for 5% of the Company’s existing issued share capital pursuant to the first tranche of the subscription.
The “anti-dilution protection” agreed with TPG would presumably make further capital raising tricky. We’re unsure whether it would complicate a possible sale also. But will another UK bank jump in to scoop up B&B in its hour of need? It looks unlikely. With HBOS and RBS undertaking their own rights issues, the remaining candidates are scarce. Lloyds might be tempted into a mercy killing - but the upside from their point of view is unclear. Plus TPG has a 1 per cent break fee written into the deal lest a bidder emerge.
Especially in the light of the deterioration in B&B’s mortgage book.
The credit impairment charge for the four months to 30 April is £36 million (year to December 2007: £23 million). The increase is mainly due to recent worsening of economic conditions which have led to house price deflation and an increase in accounts three months or more in arrears to 2.16% (31 December 2007: 1.63%). The arrears performance of the organically originated loans, particularly buy-to-let, proved substantially better than the acquired mortgages. Arrears in the more recently acquired mortgages from GMAC have been higher than anticipated. We have already cut back our purchases from GMAC to the minimum commitment under our contract.
Note too that the FSA’s prediction of ‘organised mortgage fraud’ has come good. Say B&B:
Included in the year-to-date credit impairment figures is a provision of £15m relating to a small number of organised mortgage frauds. Insurance recoveries may be available against these losses but this has not been taken into account.
At least the regulator has got something right.
