LONDON—Sometimes a 48 percent discount just isn't enough.
British lender Bradford & Bingley was on Monday forced to slash the price of its already deeply discounted rights issue, firing a warning shot for others raising funds and prompting some analysts to urge shareholders to reject the offer.
Banks, hit by the credit crunch, are scrambling to rebuild capital as the prospects for the global economy weaken and B&B's move showed there is a risk of failure for those planning rights issues even at deep discounts.
Shares in the UK's biggest mortgage lender HBOS and other banks facing rights issues, such as Switzerland's UBS, were hit as B&B's gloomy comments spilled across the European bank sector.
A profit warning and increasingly gloomy outlook for the U.K. housing market forced B&B, Britain's biggest lender to landlords, to cut the price of the rights issue to 55 pence a share from 82p.
The new price represents a discount of 65 percent to the share price before the original offer was unveiled on May 14, compared with a 48 percent discount at the previous price. The bank now plans to raise 400 million pounds through the rights issue and a side-deal selling a stake to an outside investor. B&B had originally unveiled a 300 million pound rights issue in May which it has now trimmed to 258 million.
"It's symptomatic how tough times are for the banks," said Richard Hunter, head of UK equities at brokerage Hargreaves Lansdown, adding B&B's problems were heightened by its reliance on the UK property market and wholesale markets for funding.
By 1515 GMT the shares had crashed 24 percent to 67.25 pence.
Some analysts slammed B&B for changing its planned rights issue when it had been underwritten by investment banks UBS and Citigroup.
"It's a scandal. Investors should vote against this transaction and put the underwriters on the hook at 82p," said Tim Sykes, analyst at Execution.
"I think the board of Bradford & Bingley have taken a very bad decision, particularly given the large retail involvement, they've let their shareholders down."
Retail investors own about 40 percent of B&B's stock, far higher than for other banks, and a squeeze on household spending had already raised concern many individuals will not sign up for the offer.
James Eden, analyst at Exane BNP Paribas, said it "beggars belief" that the underwriters won't be forced to buy shares at 82p and shareholders will now be further diluted.
B&B Executive Chairman Rod Kent defended the move, citing the threat of an "underwater" rights issue - where the share price falls below the discounted rights price. That would be bad for shareholders as it would have left a big overhang of stock to sell in the market, he said. Investors will get the chance to buy at the same price that U.S. private equity firm TPG bought its 23 percent stake at in the side-deal.
A sharp deterioration in B&B's prospects announced on Monday could also have forced the previous underwriting arrangement to be broken, analysts and bankers said.
B&B said it will pay about 3 percent in underwriting fees. The cost of the rights issue appears likely to be about 37 million pounds, including printing, legal and other fees.
Shares in HBOS, which will shortly attempt to raise 4 billion pounds and is also exposed to significant buy-to-let lending, fell 10 percent even though it said fundraising plans were on track and current trading was in line with previous guidance.
Royal Bank of Scotland, due to close a record 12 billion pound rights issue on Friday, dipped 1 percent to 225p, after pressure in recent weeks has dragged its shares nearer the rights issue offer price of 200p.
UBS shares lost 3 percent and France's Credit Agricole, also planning to raise funds, lost 1 percent.
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