HBOS investors take up only 10pc of rights issue

Banking giant HBOS revealed today that less than 10% of shareholders took part in its £4 billion rights issue.

Banking giant HBOS revealed today that less than 10% of shareholders took part in its £4 billion rights issue.

The group said just 8.29% of investors opted to buy heavily discounted shares as part of the scheme to help strengthen its balance sheet.

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

The investment banks have the next two days to try to sell them at a profit, and will be forced to accept the stock themselves if they fail to do so.

The low take-up means it is the worst corporate fundraising exercise since BP tried to raise £7 billion immediately after the stock market crash of 1987.

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

But since then the bank's stock has plunged in value 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.

Shares in HBOS, which is Britain's biggest mortgage lender, actually went on to fall below the discounted rights issue price on several occasions ahead of last Friday's take-up deadline.

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, will have turned their backs on the cash call.

HBOS will get its hands on the £4 billion as part of the underwriting deal. But if Morgan Stanley and Dresdner try to offload the stock on the market today and tomorrow, that could risk depressing the share price even more.

The 8% take-up rate for HBOS's rights issue is below the 19% achieved by Barclays for its recent £4.5 billion share placing.

Barclays, whose share price has also been buffeted during recent stock market turmoil, said a series of wealthy Asian and Middle Eastern investment groups picked up the remainder of the shares.

Britain's major banks have had to ask shareholders for more money to bolster their finances after suffering some hefty writedowns thanks to the credit crunch. Last month HBOS said it had written off more than £1 billion this year.

Rival Royal Bank of Scotland raised £12 billion earlier this year, also through a rights issue. It was backed by more than 95% of investors, but unlike HBOS, RBS's shares remained comfortably above the discounted issue price.

HBOS spokesman Shane O'Riordain said the group had been realistic about the take-up of the rights issue.

He said: "(It) has been conducted in the middle of a fierce financial storm. We have seen unprecedented volatility in banking stocks."

But he added: "The bottom line is that we have raised £4 billion of capital.

"Just like ships need more ballast in heavy seas, banks need more capital in tougher times. We have now raised that capital."

Mr O'Riordain said the bank would now have one of the strongest balance sheets of any bank in Europe thanks to the fundraising.

He added: "From our perspective, the key advantage of a rights issue is that all shareholders are treated in exactly the same way."

HBOS shares opened more than 4% down today.