Bradford & Bingley Investors on the Hook as TPG Walks (Update2)


By Poppy Trowbridge and Jon Menon

July 4 (Bloomberg) -- Bradford & Bingley Plc's largest shareholders agreed to lead a bailout of the U.K. mortgage lender after TPG Inc. abandoned plans to buy a 23 percent stake.

Bradford & Bingley was forced to boost a proposed share sale to 400 million pounds ($738 million) after Moody's Investors Service cut its credit rating, giving the bank the lowest ranking in the U.K. and prompting U.S. buyout firm TPG to pull its planned investment. Investors Legal & General Group Plc and Standard Life Plc said they will buy new stock after it fell 18 percent today.

TPG's pullout is the latest setback for Chairman Rod Kent, who faces the worst property slump since the 1990s and calls to resign. A surge in late mortgage payments forced the Bingley, England-based bank to slash the price of its rights offering in June and reverse earlier assurances that it didn't need new capital.

``Bradford & Bingley has been lurching from one disaster to another,'' said Leigh Goodwin, an analyst at Fox-Pitt, Kelton Ltd. in London who has an ``underperform'' rating on the stock. ``The key question is whether this is Northern Rock in slow motion, and that seems to be speeding up.''

The U.K. nationalized Northern Rock Plc in February after it ran out of funds amid the credit crunch and triggered the first run on a British bank in more than a century. Britain's Financial Services Authority, which acknowledged it didn't properly oversee Northern Rock, said it's working with Bradford & Bingley and its underwriters on the rescue plan.

`All the Players'

``We're talking to all the players involved,'' FSA spokesman Joseph Eyre said today.

The Bingley, England-based bank will offer 828 million shares, or 67 new shares for every 50 existing shares, it said in a separate Regulatory News Service statement today.

The bank fell to 50 pence, the lowest since it sold shares in December 2000. That's 5 pence below the rights- offering price, valuing the bank at 309 million pounds. The shares are down 81 percent this year, making it the worst performer in the Bloomberg Europe Banks and Financial-Services Index.

Alliance & Leicester Plc, a mortgage lender based in Leicester, England, fell 12 percent to 255.5 pence. HBOS Plc, the U.K.'s largest mortgage lender, fell 2.8 percent to 271.5 pence, below the strike price for its planned 4 billion-pound rights offering to raise new capital.

Financial firms worldwide have raised 321 billion of new capital after posting more than $400 billion in losses and writedowns since the credit-market meltdown began last year.

Fort Worth, Texas-based TPG exercised a clause to withdraw its offer of 179 million pounds for a stake in Bradford & Bingley after Moody's cut Bradford & Bingley debt rating to Baa1 from A3 and cited a ``substantial deterioration'' in asset quality.

Bad Omen

The downgrade would have increased TPG's costs to finance the deal, said Bruce Packard, an analyst at Pali International Ltd. in London. ``The fact TPG had inserted the clause about a possible downgrade suggests that they knew this might happen,'' Packard said in a note to clients today.

TPG spokesman Simon Miller declined to comment.

The U.K. Shareholders' Association said it will back Bradford & Bingley's revised plans to raise 400 million because TPG's departure means less dilution for other investors. TPG got ``preferential treatment'' in the deal that Chairman Kent favored over an alternative proposal last month from Clive Cowdery's Resolution Ltd., the association said.

``The company is not a total dead duck and we will support the rights issue,'' said Roger Lawson, a spokesman for the association. ``There are still issues about the long term and the chairman will need to step down fairly soon.''

`Change of Management'

Mike Trippitt, a London-based analyst at Oriel Securities Ltd., cut his rating on Bradford & Bingley to ``reduce'' today. ``There needs to be a change of management and a change of control,'' he said. ``To have a credit rating downgrade and a strategic investor pulling out is troubling.''

Kent, 60, became chairman of Bradford & Bingley in 2002 and has acted as chief executive officer since June 1, when Steven Crawshaw said he was leaving due to ill health. Crawshaw, 47, told investors in April that the bank was well funded and didn't need to raise cash.

Less than one month later, Bradford & Bingley said mortgage arrears were rising, triggering a 56 percent drop in its shares.

Bradford & Bingley postponed a July 7 meeting to approve the TPG stake and rights offer to mid July. The bank said its largest shareholders support the plan to increase the size of the rights offering from 258 million pounds.

Legal & General Group, Standard Life, M&G Investment Managers and HBOS Plc's Insight Investment Management support Bradford & Bingley's revised funding plan, the bank said in a statement.

`Long-Term Prospects'

``We are positive about the long-term prospects and happy to participate in funding the future of Bradford & Bingley,'' said Standard Life spokesman Richard England. Standard Life has a 5.1 percent stake in the bank. Legal & General spokesman Steve Leach also confirmed it is backing the plan.

Citigroup Inc. and UBS AG remain as underwriters, Bradford & Bingley said. ``While we are disappointed that TPG intends to terminate its subscription agreement, I am pleased that Citi and UBS and our major shareholders continue to support our proposed capital issuance,'' Kent said in the statement.

Bradford & Bingley cut its rights-offering price by a third on June 2 to 55 pence a share after saying late mortgage payments rose to 2.2 percent at the end of April from 1.6 percent at year end. The bank is locked into a contract with GMAC to buy 2.1 billion pounds of mortgages through 2009. The quality of the loans is deteriorating at a ``significantly'' rapid rate, Moody's said.

Rejecting Resolution

Resolution, the holding company that Cowdery formed after selling his insurance company this year for 5 billion pounds, offered last month to inject 400 million pounds in Bradford & Bingley. Cowdery, who said he had the support of same investors now backing Bradford & Bingley's latest bailout, offered to pay 72 pence a share for a 29.9 percent stake before the bank rejected the plan.

Cowdery, 45, built Resolution from insurers' castoffs and sold it this year to London-based Pearl Group Ltd. He has a personal fortune of at least 130 million pounds.

Resolution spokesman Alex Child-Villiers wouldn't say whether the company will consider a new bid for Bradford & Bingley. ``We are watching the banking sector to see how it develops alongside other financial-services opportunities this summer,'' he said.

Cowdery was considering the investment in Bradford & Bingley as the first step in building ``a new, larger and stronger bank'' through more acquisitions, he said. Resolution withdrew the offer because Bradford & Bingley's board was ``obstructive'' and wouldn't allow access to the bank's books.

Bradford & Bingley rejected Resolution's offer June 27, saying it lacked clarity on ``funding, change of control and price.''

`Watch Negative'

``I wouldn't be surprised if Resolution does return, but at a share price closer to our target price'' of 20 pence, said Sandy Chen, a London-based analyst at Panmure Gordon & Co. who has a ``sell'' rating on the stock. That price assumes ``a significant recovery'' in earnings, he said.

Standard & Poor's Ratings Services said today it's keeping Bradford & Bingley ``watch negative.'' TPG's departure is ``a further blow'' to the lender's credibility and financial flexibility, S&P said in a statement. ``The withdrawal of TPG suggests reduced confidence in B&B's business model from the prospective largest shareholder,''

The Moody's downgrade means Bradford & Bingley's Aire Valley trust may be in danger of falling short of its liquidity- reserve criteria, Lehman Brothers analyst Aleksandar Devic wrote in a note today. The bank may need to create a liquidity reserve fund.

Credit-default swaps on Bradford & Bingley rose 75 basis points to 345 as of 8:45 a.m., according to CMA Datavision. A basis point on a contract protecting 10 million euros ($15.7 million) of debt from default for five years is equivalent to 1,000 euros a year.

Credit-default swaps are designed to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Bloomberg.com: Worldwide