S&P cuts B&B short-term credit rating, may cut again

NEW YORK (Reuters) - Standard & Poor's on Monday cut its short-term ratings on Bradford & Bingley plc, and said it may cut them again, after the British lender said profits for 2008 will be significantly below current market estimates.

B&B said it had posted a loss for the first four months of the year and saw continued pressure on margins as funding costs remain high and the risk of customers loan defaults rises faster than expected.

"The profit warning announced today suggests that asset quality is materially worse than had previously been indicated, raising broader questions about the whole loan book," S&P said in a statement.

The bank said arrears, an indication of possible future defaults, jumped in April, particularly for mortgages recently acquired from finance giant GMAC. It also said it had uncovered mortgage fraud which cost the bank some 15 million pounds ($29.5 million).

S&P said the rapid deterioration in the assets raises serious concerns about management and B&B's commitment to continue to purchase assets from GMAC means that changes to underwriting may not substantially ameliorate loan book quality.

"Further losses due to fraud could well emerge," it said.

S&P cut B&B's short-term rating one step to "A-2" -- the second highest short-term rating -- from "A-1".

The company also announced plans for an outside lifeline as U.S. private equity firm TPG Capital -- also known as Texas Pacific -- agreed to take a 23 percent stake in the bank in its first major UK bank investment.

Despite this investment, "today's news is likely to further damage B&B's credibility, potentially increasing the possibility of the rights issue failing and the new shares being taken up by the underwriters," S&P said.

"We believe that B&B's broader financial flexibility has been severely curtailed and its ability to raise further capital in the event of a more severe deterioration in fundamentals could be very low," the ratings agency added.

(Reporting by Karen Brettell; editing by Gary Crosse)