Page last updated at 07:12 GMT, Monday, 28 April 2008 08:12 UK

HBOS mulls plan for extra funds

Branches of Bank of Scotland and Halifax in Edinburgh
HBOS has more private shareholders than any other UK company

HBOS is considering a rights issue to raise up to 4bn of extra funding from its existing shareholders.

The directors of the UK's biggest mortgage lender are meeting to discuss the share issue plan ahead of Tuesday's annual general meeting.

The bank has declined to comment on the widespread reports of a rights issue.

HBOS has 2.1 million shareholders, making it the most widely held UK share, because of the Halifax building society's demutualisation in 1997.

The Halifax merged with Bank of Scotland to form HBOS in September 2001.

HBOS's rights issue, "will be announced tomorrow [Tuesday] morning, unless investors send a clear and unambiguous signal today that they don't want it (which is highly unlikely)", according to the BBC's business editor Robert Peston.

Last week, Royal Bank of Scotland announced it was planning to raise 12bn through a rights issue.

Many analysts have expected a chorus of calls for cash from British banks under increasing financial pressure as the value of their assets deflate and the economic climate becomes tougher to operate in.

Rights issue debate

It is feared that HBOS, which was created from the merger of Bank of Scotland and Halifax, will be forced to mark down the value of investments that have been hit by the global credit crisis by up to 3bn.

Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

Two of its biggest investments, housebuilder Crest Nicholson and retirement property specialist McCarthy & Stone, have both suffered as mortgages become tougher to access and house prices cool in the UK.

Analysts say HBOS has one of the strongest capital-to-risk ratios of the UK banks and could try to battle through without asking its investors for extra money.

But others suggest that chief executive Andy Hornby may want to pursue a rights issue as a prudent move in the face of a deteriorating economic outlook.

The bank recently had to issue strong denials that it was facing a funding crisis after false rumours swept the City, sending its share price tumbling 17%.

The whispering campaign only died down after the Bank of England called media companies to deny the bank was in financial difficulties and its share price has since recovered.

However, HBOS's shares are still worth less than half the value they were trading at last June.

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