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Bradford & Bingley to raise £300m

Created:
14 May 2008
Written by:
John Adams

Bradford & Bingley is to raise £300m through an 18-for-25 rights issue at 82p. That suggests a theoretical ex-rights price of about 129p - below the 144p share price. As with Royal Bank of Scotland and HBOS, the bank is raising the funds to bolster its tier one regulatory capital ratio. A further £100m write-down against the structured finance book was also announced.

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Strengthening the capital in this way is all well and good, but it does not actually provide the bank with new money to advance to potential customers. For that, Bradford & Bingley remains worryingly dependent on the wholesale funding markets, which remain an expensive source of finance.

It's also heavily exposed to the buy-to-let sector of the housing market, an areas which we think will come under increasing pressure in the months ahead (see 'Buy to let: 20 tough questions'). These are the two main reasons why the shares have fallen 65 per cent since we advised selling them last year.

There's also the issue of dilution; assuming full take-up of the rights (virtually assured, since the issue is underwritten), shares in issue will expand by 72 per cent. The discount is steeper than that offered by either RBS and HBOS. Paul Mumford, of Cavendish Asset Management, says the terms of the issue "virtually force shareholders to buy the extra shares or else look on and witness massive dilution in value. How will this ever encourage confidence in the sector and normal market conditions to return?"

Mr Mumford adds that the emerging trend for banks to deny they are planning a cash call, and then announcing one, suggests "shareholders can only half-believe what they are being told by management."

SHARE TIP UPDATE:

Sell

Bolstering its capital places the bank on a firmer footing, but the buy-to-let market, to which B&B is exposed, is uncertain and wholesale funding remains expensive. Against that background, the rights issue looks worth avoiding, and we reiterate our sell advice (412p, 29 June 2007).

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