The poor response of investors to Bradford & Bingley’s rights issue completes an ignominious hat trick of dismal capital-raisings from UK banks.
Investors took up just 28% of the £400 million-worth of new shares on offer, leaving the deal’s underwriters led by Citi and UBS and including a syndicate of the UK’s biggest banks stuck with the rest.
Although the take-ups for the recent rights issues of HBOS and Barclays were worse, at 8.3% and 19% respectively, underwriters were able to escape footing the bill thanks to a bounce in the share price of the former and the clever structure of the latter. B&B’s syndicate, however, has had to pledge to hold the stock, worth about £320 million, for almost three weeks before trying to offload it.
Lloyds TSB, HBOS, HSBC, Royal Bank of Scotland and Barclays have sub-underwritten about £120 million-worth of stock and four large UK fund managers – Standard Life, Legal & General, M&G and Insight – underwrote about £145 million of the issue. The deal’s managers, Citi and UBS, are accountable for the rest.
The four fund managers had previously backed a rival to TPG’s investment and were encouraged by UK regulator the Financial Services Authority to take its place. The FSA is believed to have played an active role behind the scenes because it feared that a failure to raise cash for B&B could trigger a run on the bank, as was seen at Northern Rock.
The long subscription period has been blamed for the troubles of deals such as HBOS’s rights issue but investors in B&B were particularly concerned by the bank’s exposure to the buy-to-let mortgage lender, where it is the biggest player in the UK, and its reliance on the wholesale market for funding.
Downhill road to a rights issue
Bradford & Bingley share price, April 1 to August 26 2008
B&B has seen a sharp rise in mortgage payment arrears since the start of the year, with the number of accounts in arrears rising to 2.16%, compared with 1.63% at the end of December.
The bank, which some analysts expect to post a first-half loss this year, has said that it expects mortgage arrears to continue to deteriorate and says that most of the deterioration has come from the loans it acquired from GMAC.
Investor concerns about bank exposure to the troubled UK housing market and slowing economy as well as niggling worries that more money might be asked for later are not unique to B&B and may haunt any other bank that is forced to raise capital in the near future.
"Investors are nervous that banks will continue to underperform," says a senior ECM banker at a bulge-bracket investment bank in London. "A recession is a growing possibility, and banks will be exposed to any consumer downturn. With a lot of banks only thinly capitalized, this raises fears that yet more capital might be needed later. Vast amounts of capital have already been raised and investors are right to question whether it is the right time to put new capital to work and whether they really want to put that in the financial sector."
Although troubled continental European and UK banks are likely to continue to turn to rights issues as their preferred way of raising capital when necessary, other measures such as dividend cuts are likely to become more prominent as banks seek to avoid issuing more equity.
Dividend yields remain quite high so there is room for them to fall and banks will likely find it more cost effective to keep cash by cutting dividends then turning to other equity capital raising options, such as convertibles or hybrid deals.
UK banks including RBS, HBOS and B&B have already announced plans to pay their interim dividends with scrip (shares instead of cash) as a way to preserve cash and effectively raise equity by stealth, and more could follow their lead before dividends get cut for real.