Bradford & Bingley, the UK lender struggling to raise cash in a rights offering, must honour a 2006 deal to buy about £2.1 billion ($4.1 billion) of mortgages by the end of next year from GMAC LLC.
Customer payments are more than three months late on 5 per cent of loans already purchased from Detroit-based GMAC, the car and home lender trying to avert bankruptcy for its residential mortgage unit.
That's more than double the average rate for mortgages held by the Bingley, England-based bank, it said yesterday in a statement.
Rising loan defaults were "by far the biggest factor" in Bradford & Bingley's decision to sell a 23 per cent stake to US leveraged buyout firm TPG, chairman Rod Kent told analysts on a conference call.
The bank fell 24 per cent in London trading yesterday, the most since an initial public offering in 2000, after it slashed the price of the rights offering by a third and said the UK housing market is deteriorating.
The bank first agreed in 2002 to buy loans from GMAC. Steven Crawshaw, who stepped down June 1st as Bradford & Bingley's chief executive officer, renewed the deal in December 2006 and committed to buy as much as 4 billion pounds of loans a year through 2009.
Bradford & Bingley, the UK's biggest lender to landlords, reduced its purchases of GMAC loans to "the minimum under contract," or about £1.4 billion a year, the statement said. The company is required to buy the loans "only if GMAC can originate them," spokesman Neil Vanham said.
Arrears for Bradford & Bingley's acquired mortgages "have been higher than anticipated," the bank said. Late payments on its £409 million of GMAC loans rose to 5.04 per cent in April from 3.3 per cent at year end.
The UK's overall arrears rate on buy-to-let loans in the first quarter was about 1 per cent, the Council of Mortgage Lenders said last month.
Bradford & Bingley agreed in April 2007 to buy as much as £2 billion of mortgages over two years from London-based Kensington Group.
The bank slashed the price yesterday on the rights offering, reducing Bradford & Bingley's proceeds to £221 million after fees.
The bank also agreed to sell the stake to TPG for £179 million. The injection by Fort Worth, Texas-based TPG comes almost nine months after the UK government bailed out Northern Rock, which was nationalized this year.
Bradford & Bingley originally planned to offer investors rights to buy 16 shares for every 25 they own at 82 pence apiece.
The bank now will offer 19 shares for every 25 at a price of 55 pence apiece, the statement said.
The offering is underwritten by UBS AG and Citigroup.
Bloomberg