View more on these topics

Money Marketing Markets: “Rights issues and rampant inflation dent confidence”

Any hopes that the credit crunch is close to an end were dashed this week with cash calls and writedowns once again battering the banking sector.

Bradford & Bingley followed the lead of Royal Bank of Scotland and HBOS, tapping its shareholders for £300m, equivalent to a third of its market cap.

The cash call comes exactly one month to the day of B&B’s management denying a rights issue was in the offing.

Investors have been critical of the offer which will see shareholders offered 16 new shares for every 25 held in a cut-price 82p deal. B&B’s shares slid 14.75p to 144p on the news.
Paul Mumford, manager of the Cavendish UK opportunities fund, believes investors are being railroaded into buying the shares.

He says: “The real issue for investors, and for overall confidence in the sector, is the sheer magnitude of the discounts we are seeing. At 48 per cent of the closing stock price on Tuesday, Bradford & Bingley’s rights issue is the steepest yet for the market to swallow.

“It virtually forces shareholders to buy the extra shares or else look on and witness massive dilution in value. How will this ever encourage confidence in the sector and normal market conditions to return?”

“The fact that the decision comes after sustained denials of plans to raise money from shareholders, as recently as one month ago, hints that banks are in a much worse state than has previously been thought and that shareholders can only half-believe what they are being told by management. This will gnaw away at an already fragile confidence in the sector.”

That confidence had already been tested earlier in the week after bigger than expected writedowns by Alliance & Leicester saw its shares slump to a near eight year low. The bank wrote off a further £192m and finance director Chris Rhodes admitted that it is “walking a tightrope” trying to maintain its dividend.

French banking giant Credit Agricole launched a mammoth £4.7bn rights issue on Tuesday. Mumford says he expects more to fallow.

Barclays was coy about whether it will tap shareholders for cash after it wrote down a further £1.7bn on Thursday. Finance director Chris Lucas said: “We are not going to rule in or out any option.” That said, he did rule out a scrip dividend but admitted profits were down on last year.

On the macro front, stagflation was the word of the week with concerns that slowing economic growth and rising inflation could result in a return to the 1970s.

Think more rubbish bags in Leicester Square than cool bell bottoms and you will understand the market’s nervous reaction to Monday’s figures.

Eight of the 11 main categories contributed to the increase in annual headline inflation. Factory-gate prices soared 1.4 per cent in April and now stand 7.5 per cent higher than a year ago. The core annual rise hit 4.6 per cent- a 13 year high while import prices surged a further 1.9 per cent in April, pushing their annual increase to 10.3 per cent- not far off the 13.7 per cent peak seen in 2003 after the pound crashed out of the ERM.

Expect more inflationary headlines after Centrica said it will need to raise energy prices by at least 10 per cent.
New Star chief economist Simon Ward believes the Bank of England is unlikely to cut interest rates at the next meeting of the Monetary Policy Committee because of the inflation menace.

He says: “Inflation expectations are already showing signs of detaching from the target. If firms and workers build a higher trend level of inflation into price and wage-setting behaviour, the forecast return to 2 per cent or lower two years ahead is unlikely to occur.”

It was not all doom and gloom, however. BT unveiled record £20bn sales and British Airways shares soared on Friday’s news of record operating margins and its first dividend in seven years.

British Energy was also buoyed by takeover talk while National Grid saw profits up a beefy 24 per cent.

More bad news on the high street, however, with DSG International announcing it will not renew the leases on 77 of its 177 Curry outlets when they expire in the next few years. Next is also feeling the pinch, with sales down for the second month running.

All in all, the FTSE edged up to 6,338.9 by mid-afternoon Friday. Investor’s eyes remain trained on the banks but several blue chips have shown that even in the current climate healthy profits can be made. Finding those winners is the key.


Variations on a theme

“The overall retirement income market is going to grow significantly, not least because there are more defined-contribution schemes as people reach maturity,” says Burrows.

Recording sickness absence cover - thumbnail

White paper — recording sickness absence

The latest figures from the Department for Work and Pensions illustrate that sickness absence is still a major cost to businesses, with an annual bill for sick pay and associated costs to employers of £9bn. This paper from Jelf Employee Benefits looks at the importance of recording sickness absence for any employee health strategy and how this can be carried out in an efficient manner to reduce absence, improve employee engagement and drive up profits.


News and expert analysis straight to your inbox

Sign up


    Leave a comment