IN THE end it was worse than even the massively reined-in expectations. Investors in HBOS subscribed for just over 8 per cent of shares in the bank's mega-£4 billion rights issue – even if things looked more healthy late last night as the unde
rwriters got to work.
HBOS-followers in the City braced themselves for the worst last Friday.
Rival Barclays revealed then that in its major capital-raising, largely involving new money from Middle East and Far Eastern investors, existing shareholders took up just 19 per cent of the rights on offer.
If Barclays could only attract that level of support could HBOS realistically expect to do better, with its army of 2.1 million small shareholders?
Private investors are notoriously more cautious about supporting rights issues, particularly in the darkening economic horizons we are currently seeing in the UK. But the initial take-up proved far worse than Barclays.
There was some better news for HBOS, however, when the underwriters, Morgan Stanley and Dresdner Kleinwort, confirmed late yesterday that they had placed 442,916,522 new shares (about 29.5 per cent of the rights issue shares) at a price of 275p a share – the rights issue price. In other words, the underwriters have so far made no loss for their undisclosed fees.
That leaves Morgan and Dresdner with about 62 per cent of the rights issue shares. Of the shares placed yesterday, 29 per cent have been allocated to the sub-underwriters and affiliates.
HBOS believes its big private investor base was a major factor in the initial disappointing take-up.
A spokesman added: "In addition, the rights was conducted in the middle of a fierce financial storm, we saw unprecedented volatility in bank stocks."
Even so, veterans in the industry struggled to recall such a massive proportion of shares – roughly £3.8bn – initially left with the underwriters in a banking cash call on shareholders.
Before yesterday's procurement of subscribers, the underwriters had 1.375 billion shares to sell by 4:30pm today, after which they have to take the remaining nights issue stock on their own books. On the plus side, HBOS gets its money, and bolsters its balance sheet with a core tier one capital ratio of 6 to 7 per cent compared with 5.7 per cent before the capital-raising.
However, it is still a blow to the credibility of the board, led by chairman Lord Stevenson and chief executive Andy Hornby.
What went wrong? Experts say it was partly a case of the sheer length of the process.
The bank announced its cash call on 29 April and it only closed last Friday, 18 July.
That gave a lot of time for the hedge funds to short stock in HBOS – sell shares in the market in the hope of driving the price lower and then buying at the lower price to turn a profit.
They duly obliged, HBOS's shares spending a considerable time under the 275p issue price.
On Wednesday of last week, when most institutional investors were expected to make their decision on whether to support the issue, HBOS's shares closed more than 20p below the issue price at 254.5p. That compared with a price of 486p when the issue was launched.
"A bit of a no-brainer for investors, really", one analyst said yesterday. "Why would you take up the rights if you could go into the market and buy the shares cheaper?"
By comparison, the Royal Bank of Scotland share issue was announced on 22 April and concluded on Friday, 6 June.
Insiders say the faster timetable was due to RBS having far fewer smaller shareholders than HBOS. The latter needed a leviathan bureaucratic exercise to let their private investor base know what the options were.
Private investors speak for 27 per cent of HBOS, whereas the same figure at RBS is 7 per cent.
A further critical difference was that the significant bad news from the US in the final straight that helped derail HBOS's issue came after the RBS rights issue – which achieved a take-up of more than 95 per cent.
Jitters were sent through the whole mortgage market when major American mortgage agencies Fannie Mae and Freddie Mac needed government support.
Then regional savings banks in the US came under pressure and one of them, California's IndyMac, went bust.
None of this would help HBOS, particularly as it is seen as a prime mortgage play, with the market-leader in home loans in Britain, Halifax. Its historic UK market share is about 20 per cent.
Richard Hunter, head of UK equities at brokerage Hargreaves Lansdown, commented: "The obvious reason (for the low demand] is the shares spent much of the time leading up to cut-off underwater.
"But it's also investors taking a view on the UK property market, which is a decision for the steeliest investors given where we are... there's a risk aversion."
IN NUMBERS8.29%
The proportion of shareholders who took part in HBOS' £4 billion rights issue.
£3.6bn
The amount of the rights issue stock not taken up by last Friday's deadline.
124 million
The number of shares shareholders bought in the rights issue.
1.375 billion
The number of shares that the scheme's investment banks, Morgan Stanley and Dresdner Kleinwort, were left to underwrite.
£1.2bn
The amount Morgan Stanley and Dresdner sold of the leftover shares yesterday.
62%
The percentage of shares that Morgan Stanley and Dresdner were left picking up of the rights issue, worth £2.6bn.
2.1 million
The total number of HBOS small shareholders before the rights issue.
27%
The percentage of shares owned by small shareholders before the rights issue.
?
The – unknown – percentage owned by small shareholders after the rights issue.
6.2%
The percentage by which HBOS shares sagged yesterday, reaching 264.5p, below the placing price of 275p.
WHAT NEXTUNDERWRITERS Morgan Stanley and Dresdner Kleinwort swiftly found buyers for about 29.5 per cent (442,916,522) of the near-92 per cent of shares that had not been taken up in the HBOS rights issue.
That came nearly 24 hours before today's 4:30pm deadline when they must take all the rights issue shares they have not found buyers for on to their own books. They can keep the remaining 62 per cent of the shares as long as they like.
A Dresdner Kleinwort spokesman said: "We see value in the (HBOS] shares and are not under pressure to sell." The shares left with the underwriters, who have not disclosed their fees on the issue, are split evenly between them at 31 per cent each.
Most likely now is a hiatus, as HBOS shares closed in the market down 17.5p at 264.5p.
It is not in the underwriters' commercial interests to sell below 275p. There is also a reputational issue in them not being seen to do the wrong thing by clients – selling at below the rights price – to secure future underwriting work.
Shareholders not just motivated by apathy, there's disquiet out there too THE failure of the HBOS rights issue has left shareholders feeling let down by the bank and its leadership, writes Emilie Gay.
On the streets of Edinburgh yesterday holders of HBOS stock were quick to express their disillusionment over the £4 billion cash call flop.
Only one shareholder questioned by The Scotsman said he had made the decision to take up the rights issue, while others said the high share cost compared to current market value, made the decision a "no-brainer" for intelligent investors.
Many of those with larger portfolios admitted their brokers had issued advice warning against taking up the 275p-a-share offer.
Pensioner Ian Millan, 70, from Edinburgh, said he was not satisfied that taking up the rights issue would have financially benefited him in the long term.
He explained: "In the present day, you've just got to be careful with your money. We're just going to hold on to the ones we've got and wait for them to go up then sell them."
One shareholder, who asked to remain anonymous, said he had rejected the rights issue on the basis of the company's leadership.
In a reference to Andy Hornby, the HBOS chief executive who came to the bank from Asda, he said: "HBOS is run by a shopkeeper and not a banker.
"It is just a pity that they can't get back to having a banker in charge – it makes no sense."
He added: "Taking up the rights issue was just not an option for me. It's a no-brainer for intelligent people with shares in HBOS."
Edinburgh pensioner Helen Bannatyne added: "I didn't take part in the rights' issue because the actual price of the share was more expensive than the market price."
Taking a more long-term view, IT consultant David Wilson, 50, also from Edinburgh, was the only shareholder quizzed by The Scotsman who did take up his portion of the extra shares. He said: "I think that banking shares are at a very low value at the moment and they are not going to go much lower. I see it as a three– to five-year investment."
But Philip Dummer, 64, out shopping on George Street with fellow shareholder Patricia Tracey, 60, maintained he was not willing to take the risk.
He said: "The price was wrong for a start, but the main problem was that we are small shareholders and don't want to risk having any more stock market exposure – we just didn't want to put extra cash into shares in the current market."
The full article contains 1635 words and appears in The Scotsman newspaper.
