B&B sinks ever lower as investors play the blame game

By James DaleyPersonal Finance Editor

The Financial Services Authority and the Bank of England encouraged Texas Pacific Group (TPG) to walk away from buying a £179m stake in Bradford & Bingley, it emerged yesterday, believing they had secured a more concrete funding agreement from four of the ailing bank's existing shareholders.

The American private equity firm took the decision to pull out of the B&B fundraising late on Thursday evening after regulators insisted it waive its rights to change tack should there be further downgrades of the mortgage bank's credit ratings, sources close to the talks said.

Having secured cast-iron commitments from B&B'sexisting shareholders, the FSA and the Bank were not prepared to leave TPG with a get-out clause.

TPG agreed to take a 23 per cent stake in B&B at the start of last month, shortly after itissued a profits warning and slashed the price of its rights issue. However, having had only two days to carry out due diligence, the private equity group insisted on retainingthe right to walk away should there be more than one credit downgrade before the dealwas struck.

The rating agency Moody's issued its first downgrade of the bank within hours of TPG signing up to the preliminary agreement. And as the chances of a second downgrade increased over the past week, the FSA stepped in to try to create a "Plan B", to ensure there would be no chance of the bank's collapse.

By Thursday, the FSA had secured an agreement from four of the company's main shareholders – Legal & General, M&G, HBOS and Standard Life – to back a new, larger rights issue, replacing the money which would have been raised from TPG's investment.

Moody's finally confirmed its intention to downgrade B&B's debt late on Thursday evening – telling the parties involved that it would be issuing the statement within an hour. A series of telephone calls between Hector Sants, the chief executive of the FSA, Mervyn King, the Governor of the Bank of England, and David Bonderman, the founder of TPG, then took place, where TPG was asked to forgo its right to walk away from the deal after the second credit downgrade.

Mr Sants and Mr King are believed to have told Mr Bonderman that they now needed "certainty", and if it could not provide this, it should walk away from the deal.

Having become increasingly uncertain about the deal over the past few weeks, TPG decided to pull out, announcing its decision at around 10.30pm, alongside B&B's news about the new rights issue, which will be priced at just 55p a share.

Moody's eventually decided to delay the release of its credit note on B&B until yesterday morning. The report makes bleak reading for B&B shareholders, predicting that things could get worse still for the bank.

The agency said the downgrade reflected a "substantial deterioration in the bank's asset quality so far in 2008 as well as the expectation that it will weaken further during the rest of the year". It also highlighted B&B's commitment to continue buying up to £350m of mortgages each quarter from GMAC RFC – assets which have "displayed a significantly faster deterioration of ... quality than the own-originated loan portfolio of Bradford & Bingley". Moody's downgraded B&B's senior debt rating from A3 to Baa1.

The Moody's report helped to send B&B shares down almost 20 per cent yesterday. The stock closed at 50p, some 5p below the rights issue price, and more than 90 per cent below the highs of 539p that the shares hit in March 2006. The company now has a market value of just £377m.

Analysts remain pessimistic about the prospects for the bank, pointing out that the rating downgrade would only make it more expensive for the bank to raise capital, compounding its misery.

"We wrote about this company several months ago, that it could be Northern Rock in slow motion," said Leigh Goodwin at Fox-Pitt Kelton. "It looks like things may be moving a bit faster than that now.

"The company doesn't have a viable business model right now. Bad debts on the mortgage side are going up and funding costs are also going to go up now."

Resolution – the financial services group that had its bid to invest £400m in B&B knocked back last month – was left frustrated by news of the collapse of the TPG deal yesterday. Resolution had offered to pay the equivalent of 72p a share for the stake in the company, but was forced to walk away after the bank refused to let it carry out due diligence on the business. However, Resolution suggested yesterday that it was still on the lookout for other potential deals in the sector.