Underwriters bear brunt of HBOS failed rights issue

Jul 22 2008 by Peter McCusker, The Journal

UNDERWRITERS were left with the vast majority of new HBOS shares after investors shunned the bank’s £4bn rights issue.

HBOS said shareholders bought just 8.29% of the heavily discounted stock offered under the scheme to help bolster the group’s balance sheet.

It potentially saddles the rights issue’s underwriters, Morgan Stanley and Dresdner, with more than £3.6bn worth of the new shares.

The investment banks have the next two days to try to sell the stock for more than the 275p offer price, but with HBOS shares more than 2% down today at or just under the 275p level, investor appetite may be limited.

The low take-up makes the issue one of the worst corporate fundraising outcomes since BP tried to raise £7bn immediately after the stock market crash of 1987, when around 95% of stock ended up with underwriters.

HBOS’s rights issue was launched back in April when the bank’s share price was around the 500p mark. Shareholders were offered two shares at the knock-down price of 275p for every five held.

But the stock has plunged amid fears of further big write-downs in the sector and general economic gloom, severely dampening the appetite of investors to buy the new shares.

Most of the group’s estimated two million smaller investors, who were created when the Halifax Building Society demutualised in 1997 and own more than a quarter of the shares, turned their backs on the cash call.

Richard Hunter, head of UK equities at Hargreaves Lansdown, said: “I don’t think the 8% figure is in the least bit surprising given the share price has been under water for virtually the whole of the period leading up to the deadline on Friday.”

He added: “It might call into question rights issues more generally.

“HBOS had to go through eight weeks when it was exposed to the market -– in other countries the time frame is much shorter.”

HBOS will still get its hands on the £4 billion as part of the underwriting deal with Morgan Stanley and Dresdner.