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• TPG withdraws from capital injection plan after ratings agency downgrade
• Enlarged rights issue will now raise £400m, instead of £258m
• Major shareholders pledge support; extraordinary meeting adjourned.
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Bradford & Bingley's managers look less and less clever with every week that passes. First, they said the bank was not planning a rights issue, only to announce one a month later. Next, they had to re-price that rights issue after issuing a profit warning. Then, they refused to engage with an alternative proposal from Resolution, resulting in that being withdrawn. Now, the strategic investor brought in to help shore up the company's balance sheet has walked away after Moody's, the rating agency, downgraded Bradford & Bingley's debt.
At least the withdrawal of Texas Pacific (TPG) allays some concerns about it being handed shares on preferential terms, and securing the public commitment of several major institutional shareholders to the enlarged rights issue was wise. But the latest twist merely reinforces our long-running scepticism about this company.
It's worth looking at what Moody's had to say. As a credit rating agency, its analysts aren't interested in whether the shares go up or down. They're interested in whether bondholders and other creditors will get their money back in the event of the company facing acute financial distress.
It expects that asset quality will continue to deteriorate throughout the remainder of 2008, and that there will be further write-downs, although not on the scale of those announced so far. Moody's points out that Bradford & Bingley is obliged to continue acquiring mortgages from GMAC through until 2009, and that these loans have shown a faster rate of deterioration than other areas of the loan book.
Moody's described the capital injection plans as "critical", and noted that the ratings might have been lowered further but for the assurances given by the UK authorities in the wake of the Northern Rock debacle. The ratings action has implications for the company's permanent interest bearing shares, too; we had previously been positive about these owing to their relative insulation from the woe afflicting the shares.
We said sell the shares at 419p just over a year ago. They're now 53p - a decline of 87 per cent, and slightly below the rights issue price of 55p. It's likely that the underwriters will be left with lots of unsold stock, which they'll dump on the market, depressing the price further. Don't take up the rights, and sell the shares.
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