B&B cuts deal with GMAC

Article source: Peter Thal Larsen, Banking Editor - www.ft.com

B&B cuts deal with GMAC

The Bradford and Bingley, the troubled banking institution, cut a deal yesterday with GMAC-RFC to avoid having to take on, as previously agreed, the full £1.75bn mortgage asset on to its balance sheet. The agreement brings some much needed stability to the troubled bank.

The deal which allows the bank to avoid taking on an extra £1bn worth of mortgages was completed yesterday. It was originally worth £1.75bn but the two financial institutions have struck a deal which allows the bank to take on £500 million worth of mortgages by the end of this year and up to a further £250 million. This arrangement therefore reduces the burden of the original mortgage deal by £1bn.

The Bradford and Bingely will still have to pay the premiums it would have had the deal run it’s full course, an amount estimated to be between £12 and £13 million.

The agreements brings some much needed relief to the Bradford and Bingley, a bank which is suffering under the weight of its current mortgage book; a mortgage book which is suffering significantly from payment arrears. On top of this, the Bradford and Bingley has had it’s credit rating cut by two of the largest agencies on Tuesday as well as by Moody last week.

The deal was previously beginning to have a very significant effect on the troubled bank. It had turned out that the GMAC’s own mortgage book, which was to be taken on by the Bradford and Bingley, had a significantly higher level of arrears than the bank’s own mortgage book.

The arrangement instigated by the bank’s newly appointed Chief Executive, Richard Pym, will do much to stabilise the bank. The Bradford and Bingley is now coming under a lot of added scrutiny from investors and the Financial Services Authority (FSA). Indeed the Financial Services Authority has been in contact recently with some of the much larger banking institutions with a view to selling off the Bradford and Bingley and bringing some much needed stability to what is now apparently becoming a very volatile market.

The Bradford and Bingley and GMAC are extremely pleased to have arranged this deal for their relevant organisations, which although goes back on their original deal make great financial sense. It makes their individual futures a lot more certain and will bring some much needed clarity in what is apparently becoming a very uncertain worldwide financial market. The Bradford and Bingley commented last night, after completing the deal: “We think this is positive news for shareholders.” This being the first result of a planning review is a very positive result for the bank’s Chief Executive, the newly appointed Richard Pym.

GMAC said: “We are pleased to have reached this agreement which provides GMAC-RFC with certainty in this market.” This will provide added security for GMAC, as whilst they have not managed to off load the original total mortgage book worth £1.75bn they will still be getting the premium they would have got should the original deal have successfully run its full three year course. This is a good deal, which although will enable GMAC to reap the full benefits, will now allow it to review its business planning and concentrate on collecting the arrears on the extra £1bn worth of mortgages which it will keep under the deal.