Jeremy Warner's Outlook: A badly handled rights from B&B

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The Independent Online

Whoops. There goes another one. Having poured scorn on reports of a rights issue just a month ago, Bradford & Bingley has become the latest bank to swallow its pride and hand round the begging bowl. This one is comparatively small by the standards of Royal Bank of Scotland and HBOS – just £300m – but that doesn't make shareholders any happier about it. With RBS, it was obvious why the bank needed to raise money. Capital ratios had become dangerously impaired. Yet as with HBOS, B&B's need is far from clear, unless, that is, the bank is expecting a truly calamitous deterioration in the quality of its mortgage book. The B&B capital ratio, though weakened by recent Treasury write-offs, is still robust by peer group standards.

Why raise money now, when credit conditions seem to be improving, when in the depths of the crisis the bank insisted that it saw no need for it? One explanation is that with two larger banks having broken the ice, it is now that much more possible. There was apparently no direct regulatory pressure for it.

Rather, the rights issue is depicted as an exercise in rebuilding capital impaired by write-offs so as to take advantage of opportunities for balance sheet growth as liquidity conditions improve. Yet none of this adequately explains the volte-face. The real story is that Steven Crawshaw, the chief executive, was intent on doing a rights issue all along, but lost his nerve. In the end, he was happy for RBS and HBOS to mow the lawn for him first.

As it is, the issue is pitched at the now-customary deeply discounted level, with the advisers and underwriters cleaning up on the fees none-theless. This one is said to have been particularly expensive, a characteristic which cannot credibly be explained by the high costs of circularising the company's army of small shareholders. The costs are said to be a jaw-dropping £24m, or 8 per cent of the sum raised. Even by City standards, that's exorbitant, and adds to the sense of grievance which surrounds the fundraising.

It is obviously right for banks in present turbulent market conditions to underwrite. Without underwriting, there is the possibility that the share price will be chased down to a point where the issue fails, and the issuer doesn't get its money.

But deeply discounted rights issues should command commensurately lower fees. That hasn't been the case with this round of rights issues. In B&B's case, the high number of small shareholders left over from demutualisation, many of whom are unlikely to take up their rights, enabled underwriters to drive a hard bargain, both on the discount and the fee.

Will Barclays, with first-quarter figures today, be next? My understanding is that Barclays has already essentially decided to pursue the "strategic investor" route to recapitalisation, with both China Development Bank and Temasek, the Singapore wealth fund, likely to be tapped for further, though proportionately less extreme, amounts of new capital than we have seen with RBS and HBOS.

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