Moody's B&B rating cut raises asset quality fears

By Richard Barley

LONDON, July 4 (Reuters) - Moody's Investors Service's decision to cut Bradford & Bingley's (BB.L: Quote, Profile, Research) credit rating highlights the level of concern about the quality of assets at Britain's biggest buy-to-let lender, analysts said on Friday.

Moody's cut B&B's rating to Baa1 from A3 and said it might cut it again, a decision that led private equity firm TPG [TPG.UL] to pull out of a deal to inject cash into the bank. As a result, B&B has had to turn to shareholders to raise cash in a fully underwritten 400 million pound ($794 million) rights issue. [ID:nL04730984]

"What is scary for me is the Moody's press release where they say despite the 400 million rights issue they wanted to downgrade the bank," said Olivia Frieser, a bank credit analyst at BNP Paribas.

"The fact that it remains on watch negative, that they are so concerned about asset quality just makes me very uncomfortable."

The reaction in the credit derivatives market showed traders and investors were significantly more concerned about B&B's credit quality: five-year senior credit default swaps on the bank widened 100 basis points to 375 basis points, a trader said, although the swaps are relatively illiquid.

Moody's warned that B&B had seen "substantial deterioration" in asset quality so far in 2008 that would continue during the rest of the year. [ID:nWNA8752]

It also cited B&B's commitment to buy up to 350 million pounds of mortgages a quarter from GMAC RFC.

Moody's said arrears on the GMAC portfolio had risen to 5.04 percent from 3.29 percent -- a rise of 53 percent -- in just the first four months of April.