So, when is an insurance premium not an insurance premium

Jun 4 2008 By Nevill Boyd Maunsell

Horror of horrors. Imagine the agony, the recriminations, the ruined reputations, if Bradford & Bingley had stuck to its guns and pressed ahead with its rights issue at 83p, the price it originally thought of, and watched as its existing shares sank beneath it.

The underwriters - Citigroup and UBS, big boys who know all about megalosses - would have had to honour the contracts they had signed in return for fees of £37 million and take up the new shares that B&B's own shareholders left on the shelf.

That would be like asking an insurance company that has taken a premium to cover your house to pay up if the place burns down. The difference is that the insurance company does pay (not always as much as you think it should), while in the City, the concept of forcing underwriters to a failed share issue to pay up is considered unthinkable.

Rod Kent, B&B's chairman - and, it should be noted, for many years a highly regarded figure at Close Brothers -said letting a rights issue go "under water" would damage investor confidence in B&B long term. So he cut the price to just 55p, at which he passed 23 per cent of B&B to an American private equity outfit - and bumped up the underwriting fee to £40 million.

It is hard to see what that does for "long-term" confidence. But Mr Kent was up against the short-term. Yesterday the market more or less accepted that he has banished the bogey of underwriters cutting their losses and dumping an allbut limitless supply of unwanted shares. Yesterday B&B did rally early on, but had lost most of the gain by the close.

Meantime, on an altogether different scale, The Royal Bank of Scotland's £12 billion issue, priced and underwritten at 200p, was bobbing perilously close to the water level on Monday when the existing shares sank to 219.5p, down from 370p before the rights issue was announced.

The prospect loomed of the RBS's underwriters signing serious cheques in return for the £210 million they have collected in fees - or trying to wriggle out of the deal.

Then yesterday something happened. The RBS's shares leaped to 244.75p, amid talk that a hard-nosed American hedge fund, The Children's Investment Fund, was a big buyer. The irony is that TCI is credited with forcing the directors of ABN Amro to accept RBS's bid last summer. Without that none of this would have happened. Not £12 billion of it anyway.

That all leaves the riddle: When is an insurance premium not an insurance premium? When it is an underwriting fee. The Financial Services Authority might usefully devise a better answer.

Two cheers for the house-builders. They are doing their bit for the housing market, not rushing to build homes they cannot sell until prices have fallen further and the banks remember than bankers who don't lend don't eat.

The builders will still suffer as the sinking housing market devalues their land banks. A glut of unsold new homes is blamed for much of the present havoc in America. So thank our builders for refraining from replicating it here. One day their shares will be a bargain, too.