Time for B&B to find a bigger brother

Time for B&B to find a bigger brother

Last week's rescue of Bradford & Bingley was entertaining. When's the next one? The question is impertinent in one sense. This time, there are no easy get-outs for the underwriters to the rights issue. All the big high street banks are acting as sub-underwriters. The Financial Services Authority stands in the wings in case anybody suffers a wobble in the manner of TPG, the spineless private equity crew from Texas. So B&B - barring a complete calamity - will get its £400m. The regulator can't allow any other outcome.

So why did B&B's share price fall 16% yesterday? Well, it wasn't because of the wild idea - floated by a couple of analysts - that the rights issue might have to be abandoned. It was because the market is waking up to the fact that life for B&B, even after a successful fundraising, looks very tough.

While TPG's act of walking away last week was disgraceful, the private equity firm was undoubtedly correct in its analysis that B&B is a worse investment as a result of the downgrade of debt by Moody's, the rating agency. So it was perfectly logical for the shares to fall well below the rights issue price of 55p: the surprise is that the price held up on Friday.

Moody's action has two effects. First, it increased the cost of capital to B&B. That might be bearable in itself, but the second effect was to damage confidence. Moody's cited a "substantial deterioration in the bank's asset quality" and "the expectation.....continued below

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that this will weaken further during the rest of the year".

It's no use complaining about the rating agencies' role in the credit crisis. They discovered scepticism too late but their reports still carry weight. The question at B&B has always been how its portfolio of buy-to-let mortgages would perform in a severe housing downturn. Badly, Moody's is saying.

That is why the City analysts' other thought - that the long-term home for B&B lies within a bigger bank - is harder to dismiss. If that is the ultimate outcome, the regulator's job is to ensure that it happens in orderly fashion. Step one was ensuring the £400m arrives and yesterday's circular looks as water-tight as these things can be.

Situation critical

Remember the phrase "land creditors" - the housebuilders may be about to use it a lot. Land creditors are landowners who have agreed to sell land. They are creditors because their payments are deferred. On the face of it, the arrangement is quite normal: housebuilders, who always grumble about planning delays, have sought to pay for their land closer to the moment they start construction.

What's new, however, is the scale of this activity. Analysts at Royal Bank of Scotland have totted up the totals in the quoted housebuilders' accounts and reckon the sector had an unpaid bill of £2.3bn at the end of 2007. "The sector has entered the current downturn with a larger cashflow burden that in previous cycles," they comment drily.