Underwriters stuck with £2.6bn of stock after rights issue

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The Independent Online

Underwriters and sub-underwriters of HBOS's £4bn rights issue will be left holding £2.6bn of the bank's stock after investors failed to buy more than 30 per cent of the shares left from the cash call.

Only 8.3 per cent of the bank's shareholders took up their rights to buy new shares in the issue, which closed on Friday. Morgan Stanley and Dresdner Kleinwort, who fully underwrote the capital raising, sold another 29.5 per cent at the rights price of 275p yesterday. The two investment banks and the investors they signed up in advance to take about 40 per cent of the left-over stock will now have more than 932 million shares in Britain's biggest mortgage lender on their books.

The buyers of the shares were said to have included traditional long-term investors, hedge funds covering short positions. Sub-underwriters requesting more than their agreed allocation bought more than 131 million new shares yesterday and a small number of new investors were also said to have bought stakes.

The take-up for the issue was so low because HBOS's shares traded under the offer price in the days leading up to the closing of the offer.

Its shares had been battered, along with those of other banks, by a barrage of gloomy news on the economy and the financial sector.

Dresdner Kleinwort said that it was under no pressure to sell the shares and that it believed the stock was good value. It may be some time before the banks can offload the shares because the knowledge that they have the stock could put a ceiling on the share price.

Dresdner will be left with 18.6 per cent of the rights issue stock. Morgan Stanley's holding of HBOS will be less than 3 per cent.

A banking analyst said: "The upside is that HBOS has got an extra £4bn on the balance sheet now and is better capitalised. There is lots of risk priced in but that is not going to get people rushing to buy the stock. The shares will be trading under water for the foreseeable future."

HBOS announced the deeply discounted rights issue at the end of April to strengthen its capital buffer against the UK's economic slowdown. Unlike Bradford & Bingley, which had to renegotiate with its underwriters because of faulty information, HBOS's issue proceeded without alteration, leaving the underwriters to take the strain.

The bank's shares closed down 6.2 per cent at 264.5p yesterday as other UK lenders continued their recent rally. Better-than-expected second-quarter results from Bank of America cheered the market for financial stocks in general.

An HBOS spokesman said: "We have raised £4bn of capital, which means we will now be one of the most strongly capitalised banks. That's where we want to be at a time when the economic outlook is darkening."

HBOS expects the fundraising to lift its equity tier 1 capital to the upper end of its targeted 6-7 per cent range by the end of this year, above most of its European peers.

Barclays has placed £4.5bn of new shares with investors. The bank said on Friday that only 19 per cent of existing shareholders took up new stock, leaving the rest with overseas funds led by the Qatar Investment Authority.