Page last updated at 22:26 GMT, Thursday, 3 July 2008 23:26 UK

Q&A: Troubles at Bradford & Bingley

Bradford & Bingley branch
The Bradford-based lender faces a number of problems
Bradford & Bingley shares plunged last month when it reported pre-tax losses in the first four months of the year.

The firm is struggling as the UK mortgage market deteriorates.

To shore up its finances, the lender was hoping to sell a 23% stake to US private equity giant Texas Pacific Group for 179m and asking its shareholders for extra cash.

The TPG deal has fallen through - though City institutions have rallied round to raise the cash.

Why is B&B in the red?

The bank has blamed its problems on "difficult economic conditions" as home-owners struggle to repay loans, particularly regarding buy-to-let mortgages that B&B specialises in.

The value of its buy-to-let mortgages, where borrowers are either more than three months behind with payments or properties have been repossessed increased from 828m at 31 December to 1.1bn at 30 April.

The firm's return on lending is also under pressure because, like all banks, B&B faces higher lending costs due to the credit crunch.

It has also suffered losses on what it calls its "structured finance portfolio" - investments related to the US sub-prime market.

Is B&B the new Northern Rock?

The Bradford-based lender is no Northern Rock.

In its trading statement, it says it can fund itself into 2009 despite problems in money markets.

The 400m it is raising from the city institutions and its shareholders will provide an additional financial cushion.

B&B is by no means alone in trying to raise capital.

Banks worldwide are raising funds in a similar manner to plug losses.

However, there is speculation that the lender could be a takeover target as its shares plunge.

What does this mean for shareholders?

B&B shares have plunged to close to 60p in recent weeks - from yearly highs of more than 4.50.

WHAT IS A RIGHTS ISSUE?
Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

B&B shareholders are being asked to buy new shares at 55p each - down from an earlier price of 82p.

Royal Bank of Scotland has also had a rights issue - which was well subscribed to - while Halifax-owner HBOS is also going to its shareholders for cash.

Who are Texas Pacific and why were they interested in B&B?

Texas Pacific Global, known as TPG, is a global private investment firm with over $30bn worth of investments.

Its first big investment was in Continental Airlines in the early 1990s. It encountered controversy in the UK after its purchase of in-flight catering company Gate Gourmet.

Gate Gourmet fired workers who had walked out in protest at the firm's move to hire seasonal workers.

The dismissals triggered a sympathy strike by British Airways, which caused widespread disruption in 2005.

TPG is regarded as a contrarian investor and has often taken stakes in companies and industries that have fallen out of favour with more mainstream funds.

It was paying a cut price for the stake in B&B but backed away after ratings agency Moody's downgraded the lender's debt.




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