B&B rescued after investor pulls out

Institutional shareholders in Bradford & Bingley last night pledged to support the beleaguered mortgage bank after Texas Pacific Group decided not to go through with a £179m cash injection.

TPG made its decision yesterday evening after Moody's decided to downgrade B&B's credit rating by one notch to Baa1, the lowest such rating for any British bank. Significantly, the ratings cut gave the buyout group the legal right to walk away from making its planned investment. The American-based private equity group's move was being widely condemned in the City last night as "deplorable".

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Shareholders in B&B had been due to vote next week on the bank's £400m fund-raising plans that would have seen TPG put up £179m to take a 23 per cent stake in the mortgage bank alongside a £258m rights issue.

A small number of the larger shareholders in B&B have now pledged to replace the capital that TPG has withdrawn. It is unclear whether the pledge of funds will include Clive Cowdery, who had put forward alternative funding proposals to the Texas Pacific Group.

The Bank of England and the Financial Services Authority are terrified of a repeat of a run on Northern Rock and were doing all in their power last night to ensure that adequate capital was in place.

It is understood that TPG had given Rod Kent, the chairman of the B&B board, a categorical assurance that it would not walk away from the deal, even in the event of a downgrade.

TPG's withdrawal is a profound embarrassment to Mr Kent, who had refused to allow Mr Cowdery the due diligence he had demanded as part of his refinancing plan following a week of intense talks.

The TPG move was controversial from the start because it involved considerable dilution and rode roughshod over shareholders' pre-emption rights. The plan was challenged last month after Resolution, the fund set up by Mr Cowdery, waded in with a rival proposal, which he said had the support of 40 per cent of B&B's shareholders. Resolution offered to invest £400m, which would in effect have seen it take control of B&B.

Mr Cowdery's approach emer-ged after four of B&B's largest shareholders approached Resolution, unhappy with the terms of the original deal, offering to back a rival proposal. These four, Legal & General, M&G, HBOS and Standard Life, are understood to be leading the group of investors that have stepped up to support B&B now.

Resolution pulled out last Friday, saying the board had been "extremely obstructive". This prompted a furious reaction from shareholders over the B&B board's handling of the negotiations. The shareholders were planning to confront the board at the extraordinary general meeting next week.

This shareholder meeting is now likely to be postponed to allow the fundraising to be redrawn.

Moody's has been reviewing B&B's rating for a month and is expected to cut its credit rating by at least a point. A cut would also make the cost of raising capital more expensive.