Bradford & Bingley under fire over rights issue

Bradford & Bingley under fire over rights issue

Bradford & Bingley was struggling to defend its emergency £300m cash call today after insisting a month ago that no such rights issue was planned.

On a tetchy conference call with analysts and investors, chief executive Steven Crawshaw was repeatedly required to explain this morning's U-turn which he said was needed to rebuild its capital reserves following the losses it ran up by investing in the complicated financial instruments that caused the credit crunch.

The bank said the value of these assets fell by another £13m in April, on top of £262m of earlier losses. But Crawshaw said the stabilisation of the markets in April was now allowing the bank to conduct the cash call.

Analysts were far from convinced by the cash call which is intended to raise a third of the bank's current market value of just under £900m. On the conference call, James Eden, analyst at BNP Exane, summed up the mood. "I'm struggling to understand this U-turn," he said, wondering whether B&B would have proceeded with the fundraising if the markets had worsened in April rather than improved .

The bank's shares plunged to a new all-time low of 145p by 10.30am, down 13.75p, amid fears that its dividend may fall in future years. They have fallen nearly 70% in the last 12 months.

Investors will be offered 16 new shares for every 25 they already own. The rights issue is priced at 82p, a 48% discount on yesterday's closing price of 158.75p.

Earlier.....continued below

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Crawshaw said: "Now is the correct time to reinforce our capital strength to get to the point we were before those unexpected writedowns. It lets us draw a line under a lot of what has gone before," he added.

On April 14, B&B strongly denied newspaper reports that it was planning an emergency rights issue, insisting it was well-capitalised into 2009. It repeated this statement at its annual meeting the next week.

Crawshaw said that "a lot had changed in the last three weeks", and explained that B&B wanted to wait until the market had stabilised before launching a cash call.

B&B has set itself a new target for its Tier 1 capital ratio - a key measure of a bank's strength - of between 8% and 10%, and that the £300m injection would put it above the top of this range, at 10.1%.

Alex Potter, analyst at Collins Stewart, pointed out that B&B would slip down that range if it is forced into further writedowns. He said it was "innovative" to see a bank launching a rights issue unaccompanied by a profit warning, and warned he has reservations over the company's business model in the current housing downturn.

"It does not have major refinancing risks on its balance sheet in the near term but we believe it does struggle for incremental funding. Greater capital strength should help this but we feel only marginally," Potter said.

"Buy-to-let lending has not been tested in its current form in a market downturn - our view is that asset quality will move similarly to the wider mortgage market but that the buy-to-let market size may shrink quite materially more."

The credit crunch has left most UK banks nursing large losses that have depleted their capital bases. Two have already launched rights issues – Royal Bank of Scotland with a £12bn call, while HBOS is looking for £4bn.