RSA shares plunge as investors blow cool on rights issue

Royal & SunAlliance, the insurer trying to raise £960m to plug a hole in its reserves, saw its shares plunge yesterday as investors sold their rights to buy new shares in the company.

The company's shares fell sharply for the second day in a row, as investors began to decide whether to take up the new rights. They fell nearly 6 per cent during the day after Morgan Stanley circulated a negative note on the company advising investors not to subscribe to the share sale.

Investors have until 15 October to decide whether to take up the rights to one new share at 70p. These rights began trading as a commodity themselves last week, in an instrument called nil paid shares that equate to the current share price minus 70p.

These were worth as much as 22p a week ago, but yesterday plunged 18 per cent to 12.25p as shareholders dumped their rights to buy the stock. Fully paid ended the day 4.7 per cent down at 80.75p.

If many shareholders abandon their rights, it could leave investment bankers backing the rights issue with a large tab. Merrill Lynch, Cazenove and Goldman Sachs have underwritten the rights issue and will have to take up any stock unwanted in the market.

Morgan Stanley believes that RSA may need to strengthen reserves in the US by a further £297m. The group said earlier this month that it would need £800m to fill a shortfall in its reserves. "We are concerned that management may have raised the amount of capital that was possible, rather than the amount that was actually required, to put the group on a sound financial footing," said analysts at Morgan Stanley yesterday.

The investment bank also raised fears that RSA may be as much as £489m short of the capital required for an A rating from Standard & Poor's. Retaining an A rating is vital to winning new business for the RSA group.

Andy Haste, the new chief executive of RSA, spent the weeks leading up to the announcement of the right issue sweet-talking shareholders in to accepting the deal.

Shareholders have to a large extent given their support to the rights issue, but many in the City remain unconvinced that RSA can rebuild itself for growth.

Some analysts, however, say the fall in its share price is mainly down to the work of hedge funds, which began raiding the company's stock on Monday. There was heavy trading in RSA shares yesterday, with more than 100 million of fully paid shares changing hands, compared with 31 million on Monday.

"Hedge funds can do a lot of damage by trading between nil paid rights and fully paid shares. But whatever happens, RSA is going to get its £960m whatever the shortfall," said Roman Cizdyn, an analyst at Commerzbank.