Bradford & Bingley reduces the risk but still pays the fee
What on earth are share underwriters paid for? UBS and Citi agreed to underwrite Bradford & Bingley’s £300m rights issue at 82p a share but as soon as it looked like the investment banks would be left with the shares, the price of the issue has been slashed to 55p.
The fee that underwriters receive is to compensate for the risk of existing investors not taking up their rights. Repricing the issue at the last minute removes that risk but leaves the fee in place.
And the fee is not peanuts. The mortgage bank is now enhancing its reduced rights issue by issuing £179m of shares to Texas Pacific to give the private equity group a 23 per cent stake. With the rights issue reduced to £258m, B&B is thus raising a combined £437m but some £37m of that disappears in fees.
To pay a 9 per cent fee for raising money suggests B&B is desperate but to charge it while reducing the underwriting risk is even more scandalous.
That B&B is desperate was obvious, not least to the shareholders unwilling to take up the rights on their original terms. The bank is leader in lending on buy-to-let properties, which are hit particularly by falling real estate values; it is too small to be diversified; and even between announcing the rights issue and completing it it has issued a profits warning and lost its chief executive.
It is in B&B’s interest to increase the capital raised by using Texas Pacific to compensate for the reduced rights proceeds and in its interest not to leave the underwriters with a huge overhang of stock that could be sold, knocking the share price further (and damaging Texas’s new investment). But why pay the underwriters to take the risk and let them off the hook?
Prior to repricing the issue the shares had fallen to 86p compared with the 82p issue price; subsequently they have fallen to 64p which is still dangerously close to the new rights price.
It would be better to put B&B out of its misery with a takeover bid. Royal Bank of Scotland should use part of the £12bn it has been allowed to raise in a similar rights issue to buy B&B. It would cost well under £1bn. But if that happens, Texas Pacific will receive a 1 per cent break fee! Where does all this money come from?
