B&B rights retreat stuns City

B&B rights retreat stuns City

By Jane Croft, Peter Thal Larsen, Kate Burgess and Martin Arnold

Published: June 2 2008 08:46 | Last updated: June 3 2008 00:13

Bradford & Bingley sent shockwaves through the banking sector on Monday when it took the extraordinary step of renegotiating its £300m rights issue amid concerns it would face a “fight with the underwriters” if it tried to force the offering through on its original terms.

The UK’s biggest buy-to-let mortgage lender announced a profits warning saying it would make losses of £8m in the first four months because of rising arrears in its mortgage book. The dire trading was disclosed to B&B’s board 11 days before Monday’s announcement to the market – and just nine days after its rights issue was announced.

The Financial Services Authority was aware of the problem and took part in talks on how to tackle it. It was discussed by the board last Tuesday, a person familiar with the matter said.

The trading performance caused the bank to rethink its capital-raising plans announced in mid-May amid fears that underwriters Citigroup and UBS were likely to claim trading conditions had deteriorated so much that they were legally entitled to walk away. One person close to the company said “the alternative was to have a fight with the underwriters”.

B&B’s decision to change the terms of its fully underwritten rights issue stunned the City. Investors and analysts questioned why B&B had repriced the issue at 55p when it had already been fully guaranteed by UBS and Citigroup at 82p a share.

William Claxton Smith at Insight Investment Management, the bank’s eighth-largest shareholder, said: ”I’ve never seen anything like this before, that is a rights issue cancelled.”

Another said: “Underwriters had effectively pulled the plug on an underwriting agreement. There is general bemusement – what on earth has happened? In 10 days everything appears to have changed.”

B&B said the repriced offering would raise £257m from investors and a further £179m from bringing in private equity investor TPG as a 23 per cent shareholder.

TPG’s involvement could even see substantial performance-linked bonus schemes created for the existing management, according to one person familiar with the buyout firm’s plans.

Rod Kent, executive chairman of B&B, said it would be bad for B&B’s 850,000 retail shareholders to have a rights issue priced above the current share price.

“The consequences of having an underwater rights issue would not be in the best interests of shareholders. You would have a troubled market after the rights issue and have some overhang (of stock).”

Mr Kent was accused by analysts of letting the underwriters off the hook. James Eden, analyst at BNP Exane, told Mr Kent the move was “disgraceful” and said it “beggars belief” that the underwriters had already been promised £37m to take on the risk of unsold stock.

Citigroup and UBS declined to comment. Goldman Sachs advised B&B while Deutsche Bank advised TPG.

---------------------
Soros sounds alarm on oil ‘bubble’

By Joanna Chung in Washington

Published: June 3 2008 05:06 | Last updated: June 3 2008 05:06

Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.

He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.

“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”

The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators – including hedge funds, pension funds and other institutional investors – in the rising costs of energy and food. The fund declined to comment on its specific market positions.

Regulators and other officials have said surges in oil and commodity prices are mainly due to fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities.

However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.

Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” his prepared remarks say.

“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.

-------------------------
Brazil wins second key investment rating

By Jonathan Wheatley in São Paulo

Published: May 29 2008 23:09 | Last updated: May 29 2008 23:09

Fitch Ratings has given Brazil a second investment grade rating – following the lead of Standard & Poor’s on April 30 – opening the way to a potential flood of investment in the country from big institutional investors.

Many of these may invest in a country’s debt only if it has an investment grade rating from at least two of the three big agencies – S&P, Fitch and Moody’s.

Yet Brazilian assets remained relatively calm on the news on Thursday. The main São Paulo stock index rose about 2,000 points before returning to about 72,200 points within an hour of the announcement. Brazil’s currency, the real, strengthened against the US dollar from R$1.653 to R$1.638.

“You can’t lose sight of the fact that global financial markets are in crisis,” said Marcelo Salomon, chief economist at Unibanco, a big Brazilian bank. “This won’t change the world overnight.”

Mr Salomon welcomed the upgrade as recognition of Brazil’s track record of good policy-making under President Luiz Inácio Lula da Silva and previous leaders. The institutions have all been maintained – inflation targeting, the fiscal responsibility law, and the freedom of the central bank to act when and how it wishes to control inflation,” he said.

Fitch said the upgrade reflected the “dramatic improvement in Brazil’s external and public sector balance sheet that has greatly reduced Brazil’s vulnerability to external and exchange rate shocks”.

Fitch, S&P and the two smaller agencies that have given Brazil investment grades in the past two months – R&I of Japan and DBRS of Canada – have all stressed the need for further improvements in Brazil’s fiscal performance if the country is to move further up the investment-grade ladder.

Shetty Shelly, senior director in Fitch’s sovereign group, said: “We recognise there are structural weaknesses in public finance, but we do think the overall performance is improving. The government has consistently met its fiscal targets, even in years of low growth.

Mohamed El-Erian, co-chief executive of Pimco, a leading investment management company, said: “The Fitch action is an overdue recognition of the realities on the ground in Brazil, that include a dramatic improvement in both reserve holdings and debt management.”

Mr Salomon said the move would act as a guarantee to keep Brazil on the right track. He said: “Brazilian companies have been getting more professional, formalising their accounts, creating more jobs. What they need from the government is more improvements on the fiscal side, to show that it is committed to fiscal stability.

“The best thing for companies is for Brazil to achieve steady upgrades, to improve credit conditions for everybody, rather than ad hoc industrial policies aimed at individual sectors.”