Sub-prime mortgage fallout could spell disaster for pending deals

The sub-prime mortgage crisis may yet claim more victims before the extent of the liabilities of US lenders is fully uncovered, analysts, economists and fund managers warned over the weekend. The uncertainty and volatility that has undermined global markets over the past few days could spell disaster for a number of pending deals and bids, as well as having major economic implications.

One deal at the forefront of speculation is the race for the Dutch bank ABN Amro. While Barclays and a consortium led by Royal Bank of Scotland have fought a fierce battle to take control of ABN, both sides' bids could fall through if the sub-prime crisis worsens. This is because Barclays and the consortium have made bids that depend on them being able to raise money from equity and debt markets to finance the offers on the table.

On Friday, Barclays was the subject of speculation on the London stock market as investors predicted it would pull out of the race for ABN. The value of its bid for the Dutch bank has fallen because it consists of a large chunk of Barclays' own shares.

Even if Barclays is forced to pull out, the RBS consortium will not necessarily be able to pull off the takeover. RBS and its co-bidders, Santander of Spain and Fortis of Belgium, have won the approval of shareholders to embark on the large-scale fund-raising required to pay for the joint bid. Crucially, however, the money has not yet been raised. Fortis could be vulnerable to the current volatility, as it is looking for €13bn from a rights issue, plus a further €10bn in debt. RBS, meanwhile, must raise €4bn from a rights issue.

A headache for the deal could be the recent purchase of Alliance Boots by KKR. While KKR struck agreement with banks providing finance for the takeover before the worst of the sub-prime crisis began, these banks have subsequently found it difficult to syndicate the debt, in many cases accepting discounted rates from partners. The banking industry may, therefore, be reluctant to offer the RBS consortium its support.

Other high-profile victims of the crisis that have still to emerge are likely to include a significant number of hedge funds. Shares in Man Group, the largest listed hedge fund group in the world, have tumbled, after its decision on Friday to shelve the flotation of a new vehicle on the New York Stock Exchange.

One consequence of the turmoil in the UK could be a slowdown in the housing market. Nationwide Building Society warned that many UK lenders would find it harder to raise money for their mortgage book, which could force them to be more picky about borrowers.