Bradford & Bingley on tortuous way into final straight

Bradford & Bingley this morning begins a critical final week for its tortuous rights issue, having reached the home straight with shareholder support for the vital cash call still hanging in the balance.

Shares in the mortgage bank languished close to the 55p issue price for almost two months and executive chairman Rod Kent is preparing for support from City and private investors to be thin when the rights issue closes on Friday at 11am.

Only 8% of shareholders took up their rights last month in a deeply discounted £4bn cash call by B&B's much larger rival HBOS. Kent is expected to use this as a benchmark, claiming any level of acceptance greater than 8% would be an outstanding result.

This would leave the vast majority of the new shares in the hands of sub-underwriters to the rights issue. These include six high street banks - Abbey, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Barclays - which between them have guaranteed more than half of the £400m being raised by B&B. Four institutional shareholders - Legal & General, Standard Life, Prudential's M&G and HBOS's Insight - have also pledged to take a portion of any unwanted rump.

One of the most eventful capital raisings in British corporate history, B&B's rights issue has been on the brink of collapse on at least three occasions, but each time has been righted by the increasingly resourceful Kent. The issue has had to weather a profits warning, the shock departure of a chief executive through ill health, a damaging credit-rating downgrade, a desertion by investors and a shareholder rebellion.

Last Friday shares closed down fractionally at 54p. They have been changing hands at around the rights issue price of 55p since early June and would need to climb sharply this week for undecided B&B shareholders to be galvanised into taking up their rights.

More than a third of investors at the bank are small shareholders - a legacy of its previous incarnation as a building society - who are not expected to take up their rights unless they perceive substantial value in the new shares over and above those already trading on the stock exchange. Small shareholders held 27% of equity at HBOS before its rights issue and their lack of interest left a large hole in the fundraising.

The strain that rescue rights issues from B&B, HBOS and other banks have suffered this year has prompted calls from many institutional investors for a radical reform to the capital-raising process. Critics claim the protracted timescale of a UK cash call is no longer appropriate in modern, fast-moving markets.

The trading environment for all British mortgage banks has worsened markedly over the period of B&B's rights issue. In June, terms for the cash call had to be hastily redrawn after the mortgage bank issued a profits warning, citing a sharp rise in the level of loan repayments in arrears.

Northern Rock, Alliance & Leicester and HBOS have all since posted figures showing a rising trend of arrears across the mortgage market for the first half of 2008, with little sign of it abating. These updates will only heighten investor fears about the health of B&B's mortgage book.

The appetite for financial stocks may also have been hit after a humbling week for the banking sector, during which a parade of management teams unveiled plunging profits.

B&B, which had been due to post its half-year figures - including an arrears update - last week, has delayed reporting results until August 29, well after the closure of its rights issue.