Monday, June 02, 2008

Stop me if you think you've heard this one before

Stop me, oh oh oh stop me
Stop me if you think you've heard this one before
- The Smiths

It's like deja vu all over again
- Yogi Berra

It's said that history doesn't repeat, but it rhymes. In that case, break out your Norton Anthology of Poetry, because there's a story brewing in the UK that will remind you of the heady days of last September.

UK mortgage lender Bradford and Bingley has come under the cosh this morning after announcing a profit warning and issuing stock at 55p a share to Texas Pacific. While that is not necessarily a bad thing, it doesn't look good when your stock closed at 88.25 on Friday and you have an existing share offering which has been priced at 82p. Doh! Someone, namely the underwriters, has been left holding a very smelly bag. The chief executive has resigned, and the share price has dumped, and has now closed most of the discount to the offering level in the Texas Pacific deal.
B&B has been well known as a weak hand in the current environment, as they have a large market share in the formerly lucrative but now toxic "buy to let" mortgage segment. April mortgage approvals registering the lowest print in history will not have improved sentiment, either. Already, there are unconfirmed reports of queues outside of B&B branches.

If all of this sounds familiar, it should. The backdrop is eerily similar to the Northern Rock fiasco of last September; all we need now is Swervin' Mervyn to tell us that there will be no bailouts, and we'll know that the end is nigh for B&B. In any case, when NRK's share price started to gap lower like B&B's has done today, the situation swiftly became terminal.
Such a scenario would clearly not sit well with the equities generally and the FTSE (where Macro Man retains a short exposure) in particular, where the share price of bigger fish (RBS) is also rapidly approaching its capital-raising tender level. As Macro Man types, the FTSE is sitting bang on support at 5985; a break would target another 2% lower before you can say "nationalization."
Stocks elsewhere have also rolled over, and Macro Man is very keen indeed to see if that weakness persists now that the month-end window dressing is over. If so, it could herald the start of another rather interesting summer....


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Anonymous said...

MM - This is not a particularly big deal for TPG and it makes me wonder how much due diligence was really done. Undoubtedly they are short the put, but then aren't most PE deals?

It is a bullish statement for nominal real estate prices, for even after this deal, the equity remains wafer thin an the puke in the buy-to-let market remains in front of us. They are patently betting that won't happen.

Perhaps the average B&B loan has a prudent 20% down, and borrowing households with TWO stable incomes that can service it. I would love to know what their book looks like in terms of loan-to-value ratios, breakdowns of the buckets by calendar quarter of loan. Eyeballing aggregate financials suggests a huge portion of growth was at precisely the wrong moments. And any guesses on loan recovery rates on shitty terraced houses in the UK?? I think TPG will not see the backside of their investment unless nominal prices stabiilize NOW.


Macro Man said...

C, the ongoing collapse in mortgage approvals suggest it ain't gonna happen. Indeed, I think it was a B&B exec today that was quoted as saying they had substantially downgraded their view on UK housing, which was previously for 'moderate' declines.

When someone asked this morning why TPG would do this deal, I said flippantly "because they're buying at 55p and it can only go to zero'. Maybe there's something to that. Have you any idea of their normal deal size?

Anonymous said...

IN Korea and Japan they were buyers AFTER the bust-up - taking clean (well, sort of) balance sheets and what was left of the lame business and adding the required capital then sitting tight for recovery until they can flip their way out. And THAT seems like a good gameplan, and precisely where one would like to be. Of course what's left of "good" assets can sour, and others can be misclassified, but it still seems the better place to be than trying to second-guess where the rot stops, and how moth-eaten the existing loan book actually is likely to be on a forward looking basis. And then there is the little chestnut of Sterling exposure...

Didn't some other big swinging Texan investor seem to have cocked-up major in his purchase of a certain premiershit club??


Macro Man said...

Now granted, I am not a gifted private equity professional like that Equity Private woman, let alone a legend like Tom Hicks. But I would have thought that pissing off your co-purchaser to the degree that he's publicly said he'll sell to anyone but you, while at the same time alienating your customer base to an impressive degree, is not exactly the path to riches.....

D said...

TPG's recent plays:

1) dumped $7 billion into Washington Mutual
2) part of a 3 entity investor group that bought $12 billion in debt from Citi
3)with Goldman bought Alltell for $27 billion
4) with Silverlake bought Avaya for $8 billion

Like the Midwest air deal, this is surprisingly small for TPG, but without question they have an affinity for burning assets. But like an underground fire, some things just have to burn out on their own.

Knife Catching Rule 1:

Catch financial knives by leveraging other people's money.

Macro Man said...

Thanks, D. We were wondering on the desk this morning why anyone would piss away $300 mio on a turd like B&B when there's little chance that they'd have been able to do the correct amount of due diligence. But if you can find (someone else's) $300 mio underneath the sofa cushions, hey, why not?

DWK said...

When i saw the title, i immediately thought The Smiths, and secondly, Northern Rock part deux! I've been a tourist on your blog for sometime, and would never have thought of you as a Smiths fan. Good stuff. Keep up the solid work.

D said...

I've got some friends with money, but no one that would look the other way if I blew a few hundred mill on a buy to let bank that went tits up.

Time pay Dallas/Houston/Austin another visit, need to make some new Texan friends!