Capital injection in balance as Bradford & Bingley braces for credit downgrade

Capital injection in balance as Bradford & Bingley braces for credit downgrade

Private equity house TPG was tonight deciding whether to proceed with a crucial capital injection into Bradford & Bingley after the buy-to-let lender faced a downgrade of its credit rating by Moody's Investors Service.

The £179m investment from the Texan private equity firm is a crucial and controversial component of a £400m fundraising exercise by the cash-strapped lender.

If TPG decided to use a get-out clause that allows it to pull out of the financing in case the lender is downgraded, it would mean that the bank would need to find additional financing from other means.

The downgrade by Moody's to Baa1 was expected tonight, giving the lender the lowest credit rating of any major UK bank.

Under the terms it negotiated to get involved in the bank's fundraising, TPG was able to walk away if the bank's credit rating — which affects the price at which it raises money on capital markets — was downgraded.

The involvement of TPG is inextricably linked to a £258m rights issue, which shareholders must vote on by the end of today. The shareholder meeting to ratify the rights issue and TPG investment is scheduled for Monday.

The rights issue is underwritten by Citi and UBS and it is thought that B&B was confident that it had other means of raising the £179m injected by TPG. Major City investors are known to have been ready to put more cash into the lender and had backed a rival fundraising by financier.....continued below

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Clive Cowdery, which was rejected by the bank's board last week.

Even without the fundraising, B&B is considered to be solvent by the Financial Services Authority. It had insisted it only wanted to raise the money to keep its capital ratios high.

After the fundraising it would have a core tier one capital ratio of between 8% and 10% — higher than Royal Bank of Scotland, which recently raised a record-breaking £12bn to push its ratio to 6%.

However, the B&B rights issue has been marred by controversy from the outset. After denying the need to raise finance on April 14, it announced a rights issue on May 14 only to take the unprecedented step on June 2 of repricing the rights issue and calling TPG to bolster the fundraising. The June repricing — from 82p a share to 55p a share — took place because B&B needed to issue a profits warning after uncovering a rise in arrears among its mortgage customers.

B&B is understood to have been preparing an alternative financing in the event TPG walked away, which would involve other investors stepping in to take up the shares that would have been bought by the private equity group. The funding was expected to come from a range of other investors rather than a single institution. City regulators were keeping a watch on the issue tonight and are keen to prevent a loss of confidence in the bank in the event that TPG decides not to proceed with its investment.

The private equity house has been keen to invest in the buy-to-let lender, believing that it could meet its requirements of a 20% return on its investment each year. It intends to rebuild B&B and then use the lender as a means to acquire other mortgage books — in much the same way as Cowdery had planned.

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