Bradford & Bingley & Broken?

Rights, Scams and Politics

02 June 2008 | 0 Comments

Disaster hits B&B as it makes a loss and raises emergency cash from an investment fund. What next for its shareholders, customers and staff?

It's been a day to forget for shareholders of struggling building-society-turned-bank Bradford & Bingley (LSE: BB.). B&B's shares were suspended from trading at 7.52am, only to be reinstated at 8.10am after the lender issued a profit warning. In a stock-market announcement, the UK's eighth-largest bank revealed five shockers: 1.    US private-equity firm Texas Pacific Group is buying a 23% stake in the bank at 55p a share, for a total of £179 million. 2.    B&B's recently announced rights issue has been scrapped and replaced by a restructured issue of £258 million. The original rights issue, announced last month, offered new shares to existing shareholders at 82p. As the market price is now below this level, shareholders can buy B&B shares more cheaply in the stock market. Hence, the previous rights issue was cancelled. The new deal offers shareholders 19 new shares at 55p for every 25 shares held. 3.    B&B made an £8 million pre-tax loss for January to April, versus a £108 million profit in the same period of 2007. B&B had expected to make £150 million in the first four months of 2008. 4.    The lender warned of tough times to come for the UK housing market, as write-offs, bad debts and arrears rise in buy-to-let lending. 5.    B&B's chief executive, Steven Crawshaw, is suffering from a heart condition and has stepped down. We wish him a speedy return to health. There may be trouble ahead... Naturally, B&B's share price plunged, with other banks' shares following suit. Having closed at 88.25p on Friday, Bradford & Bingley's share price dived as low as 60p (down 32%), before recovering to 66p (down 22%) as I write. Bradford & Bingley is particularly exposed to specialist mortgage lending, including buy to let (where it is the market leader), self-certification (alias `liar loans') and negative-equity and 100%+ loans. The big worry for Bradford & Bingley (and other mortgage lenders and property investors) is that its buy-to-let business model has never been stress-tested in a housing downturn. B&B is the UK's largest lender in the buy-to-let sector, with a share of a fifth (20%) of this £120 billion market. Buy to let really thrived during the twelve-year housing boom which began in the mid-Nineties. But will buy-to-let investors hold their nerve if house prices fall between 20% and 30%? Homeowners will do almost anything to keep the roof over their head, but will amateur landlords be tempted to walk away when times get tough? Anyway, what lies ahead for Bradford & Bingley stakeholders? Let's take a look: Shareholders No one knows how buy to let will play out if house prices fall for a sustained period. It may even be the case that the buy-to-let bubble has burst and this model has broken down. When times get tough, homeowners will be a better bet than property investors, so the future looks grim for B&B. You'd have to be a very brave investor to buy shares in Bradford & Bingley at present. The long-awaited housing-market downturn has only just begun, and the UK economy has yet to go into recession. Nevertheless, B&B is already showing signs of financial strain, even though the worst is still yet to come. Therefore, things look pretty nasty for B&B's owners. TPG Capital is paying 55p a share for almost a quarter of Bradford & Bingley, with the replacement rights issue at the same price. Therefore, there is no reason why existing shareholders should value their shares at much above this level. What's more, the dividend will definitely be cut later in the year. In short, if I were a shareholder in B&B, I would head for the exit by selling my shares.Borrowers Bradford & Bingley's net interest margin (the difference between its borrowing rates and savings rates) is in decline. To stop the rot, B&B must increase interest rates on lending. Therefore, mortgages and other loans are set to become more expensive for new and existing borrowers. Hence, it may make sense for B&B borrowers to look into remortgaging in order to lock in a lower rate. Savers Savers with Bradford & Bingley should not panic. The company is not bust and might just hit its profit target of £150 million in 2008. B&B is not poised to `do a Northern Rock', so your savings are safe. Furthermore, the first £35,000 of your savings is protected by the Financial Services Compensation Scheme (FSCS). Thus, there's no need to start queuing up at your local B&B branch! Then again, B&B needs to make some tough decisions in order to restore its profitability. It may be forced to cut savings rates in order to restore its interest margin. Indeed, B&B has yet to cut its rates in response to recent reductions in the Bank of England's base rate. Accordingly, now would be a good to shop around for a Best Buy savings account, in order to earn a table-topping rate of interest. Customers The former building society has more than three million customers. Alas, given that the group is in turmoil, it seems probable that customer service will suffer in the short term. In order to `turn the tanker around', Bradford and Bingley will have to take a knife to its cost base. Possibly, these cuts may well include staff reductions and increased use of call centres and offshore facilities. Hence, customers should brace themselves for a decline in standards. Staff I feel particularly sad for Bradford & Bingley employees. As well as receiving free shares at 248p in the flotation in December 2000, many will have bought extra shares via employee savings schemes such as Sharesave and Share Incentive Plans. The value of these shares has plunged by almost nine-tenths (88%) since the share price peaked at 536p on 20 March 2006. Alas, B&B workers have suffered a huge hit to their nest egg. Even worse, Bradford & Bingley is sure to follow in Northern Rock's footsteps by downsizing its workforce. Thus, jobs may well be lost at head office and across its entire branch network. So, let's hope that redundant B&B employees find new jobs as soon as possible. Finally, my Foolish colleague Maynard Paton warned that B&B was a risky investment more than four years ago in Why Some Banks Look Cheap. In addition, I've been banging on about the twin dangers of rising house prices and personal debt since I joined Fool.co.uk in 2003. Nevertheless, in the words of Scooby Doo: "Yikes!"More: Find marvellous mortgages and super savings accounts | Bad News For Banks And Borrowers | Super Savings Accounts That Slaughter Inflation

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