HBOS rights issue looks set to sink as B&B stays afloat

12 June 2008 / by Rebecca Sargent
The British banking sector has been rocked by new uncertainty as the HBOS rights issue looks unlikely to succeed.

Shares in HBOS closed at 258p yesterday, 17p below the rights issue 'reduced' price of 275p and 237p below the April value of just over 495p.

The rights issue was originally announced in response to a rapid share fall at the hands of short-sellers in the city, who announced false rumours of the bank's stability before snapping up cut-price shares to sell on at an increased cost once share prices recovered.

Experts believe the scam, which is currently under investigation by the Financial Services Authority (FSA), was repeated yesterday, resulting in such a steep share decline. According to experts, HBOS is an easy target for short-selling due to its heavy exposure to the UK mortgage market (it holds a 20 per cent market share), putting it at risk in the current property market conditions.

However, despite its shaky shares, HBOS's £4billion rights issue is fully underwritten by Morgan Stanley and Dresdner Kleinwort who, according to experts are confident that HBOS shares will regain their value within the five weeks before the rights issue is scheduled to close.

Consequently, it is rumoured to be unlikely that Morgan Stanley or Dresdner Kleinwort will try to worm out of the deal which could see them picking up a £4billion bill. The news contrasts with the recent furore caused by Bradford & Bingley as its underwriters became nervous, forcing the buy-to-let mortgage specialist to renegotiate the terms of its rights issue much to the despair of its shareholders.

As shares in Bradford & Bingley began to decline in price, the bank was forced to change its original rights issue which, like HBOS, offered 'cut-price' shares at more than the actual share value due to a decline in market conditions. And, as shares fell, so too did its underwriters' confidence, forcing B&B to secure a 23 per cent stake sale to American private equity company TPG, in a seemingly shameless disregard of shareholders rights.

As a result of Bradford & Bingley's botched rights issue, it has been reported that shareholders are calling for its chairman Rod Kent's resignation. One shareholder told The Times: "It is something we will be looking at very closely. The chief executive, Steven Crawshaw, has already stepped down; the question is whether more are needed."



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