Bradford & Bingley (B&B) is heading for one of Britain’s most expensive rights issues with a £55 million bill to raise only £400 million, according to information released to shareholders.

In further bad news for investors, the troubled bank’s stock fell 16 per cent yesterday to a low of 42p a share, 13p below the rights issue subscription price. That left sub-underwriting investors including M&G, Legal & General, Insight Investment and Standard Life nursing a notional £42 million loss days after they agreed to a bailout.

Moody’s, the ratings agency that downgraded B&B on Friday, increased the pressure by saying that the bank had 30 days to inject tens of millions of pounds into an £8 billion mortgage securitisation vehicle called Aire Valley.

Yesterday B&B posted a circular for its third attempt at a capital raising, after the previous two were scuppered by unexpected bad debts and the decision by TPG, the private equity firm, to abandon plans to invest in the bank.

The extraordinary meeting needed to approve the rights issue will now be held next Thursday in Sheffield. Figures in the circular showed that B&B would face costs of more than 13 per cent of the £400 million it needs to raise to prop up its balance sheet. That makes the bank’s rights issue much more expensive than the recent ones from Royal Bank of Scotland (RBS) and HBOS.

RBS paid just over 3 per cent, or about £384 million, to raise £12 billion. HBOS will pay a similar rate, or about £122 million, to raise £4 billion. B&B was due to pay almost £24 million to raise the £300 million targeted in its first rights issue. The cost of raising capital shot up to £36 million for the second deal with TPG, which involved the private equity firm acquiring a 23 per cent stake in B&B for £179 million, and a further £258 million being raised in a rights issue.

B&B is unlikely to recoup the £3 million in commitment fees that it paid the underwriters UBS and Citigroup to guarantee the second rights issue. The 4.75 per cent underwriting fee will remain the same for the third capital raising but the sources close to B&B said increasing complexity had forced up the cost of legal and other advice. The £55 million also covers the cost of posting a supplementary prospectus this week to B&B’s million shareholders.

The bank has said its capital raising was being supported by a number of shareholders but has refused to reveal the nature of the support.

Investors are thought to have agreed to sub-underwrite an amount close to the £179 million that had been due to be raised from TPG.

Standard Life and Legal and General are believed to have agreed to take about £50 million of the issue each, while M&G is understood to be sub-underwriting close to £25 million and Insight under £20 million. The shareholders will also take up their allotments and are thought to have committed to voting the capital-raising through.

With the share price having fallen well below the subscription price of 55p, retail investors appear increasingly unlikely to subscribe to the issue, leaving the underwriters and sub-underwriters with the lion’s share of the £400 million-worth of stock. Based on yesterday’s 42p closing price, they were already sitting on a £94 million notional loss, including a £42 million loss for the sub-underwriters.

Meanwhile, B&B must pour tens of millions of pounds into Aire Valley. B&B provides the vehicle with mortgages, which Aire Valley turns into a bond called a floating-rate note, with the cash raised from bondholders going back to B&B.

The bank has shouldered Aire Valley’s exposure to rising interest rates via an interest-rate swap. That is important because the rates make a significant difference to the cost of covering the note payments.

However, after Friday’s downgrade, B&B no longer qualifies as a counterparty under the terms of the swap. That means it must provide the vehicle with tens of millions of pounds in extra collateral or find another bank that is willing to take its place as the swap counterparty. That is likely to be expensive in the current market.

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