Jeremy Warner's Outlook: Mystery of HBOS nil-paid rights

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The HBOS rights turn out to be worth something, after all. For the past few weeks, the £4bn rights issue has been bobbing in and out of the money, sometimes under water, sometimes briefly surfacing above the waves. In any case, the issue looked likely to be left with the underwriters, vindicating those who have argued that rights issues are an inappropriate way of raising new capital for the beleaguered banking sector.

Well, the nil-paid rights started trading for the first time yesterday, and at a pretty reasonable price too, given where the shares are. If the stock market price of the shares is at or below the rights issue price, the nil-paid rights should in theory be worth nothing at all. In fact, they closed last night at 13.5p, and were at one stage as high as 21p, which is plainly a lot more than the difference between the rights price of 275p and the market price of 278.5p.

How to explain this apparent anomaly? In part, the explanation lies with the very same short- selling hedgies who have been conspiring to drive the price lower. Eventually, they must close their positions. Buying the rights provides a potentially low-cost way of doing so.

The nil-paid rights are in truth no more than an option on where the share price will be in three weeks, when the rights issue closes. What the value being attributed to the nil-paid rights tells us is that in the end the rights issue ought to avoid a damaging flop.

But if you think it's heading for Davy Jones's locker, you can always sell now and make yourself a few quid. HBOS has a free dealing service for its 2.1 million small shareholders. Who said pre-emption rights were worthless? Barclays investors, who are being diluted by a placing of new capital with overseas investors, take note.