Neil Collins

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A bad blow for B&B bondholders

May 27, 2009

Quick, Bradford & Bingley bonds are yielding more than 100 per cent. Oh, sorry, they’re not. They’re not yielding anything after a grim little statement from the company after the markets closed on Tuesday.

For the first time since the bank was nationalised, the board has decided to miss the next interest payments on B&B’s subordinated debt. Those who bought the 11.625 per cent perpetual bonds at 30, hoping for a return of almost 40 per cent a year on their investment, have lost two-thirds of their capital overnight.

Worse still, thanks to the new 2009 Banking Act, missing an interest payment on these bonds no longer counts as a default, so there’s nothing the holders can do. They could sell them to brokers Collins Stewart, but the price is likely to be less than 10 per cent of face value.

There are a few crumbs of comfort. The interest payment is not (yet) lost completely, since missed payments accrue until such time as the board feels able to pay them. Indeed, the business plan that was published in March contained, in paragraph 4.2.1, an “expectation that creditors will be paid out in full”.

Since then B&B’s specialist markets, cruelly dubbed buy-to-flip and liar loans, have got no better, while persuading B&B’s borrowers to take their mortgages eslewhere is an uphill struggle. The subordinated¬†bonds are a bet on the difference between the ultimate value of B&B’s assets, in last December’s books at 56 billion pounds¬†and all the other liabilities. So a mere 10 per cent shortfall would wipe out the 560 million pound value of the bonds.