Hard times for HBOS rights issue

Money Talk
By Justin Urquhart Stewart
Seven Investment Management

Justin Urquhart Stuart says investors may have a difficult choice

As you will no doubt have gathered by now, the purpose of a rights issue is to raise new money for the company concerned.

Unfortunately in its current form the HBOS rights issue has become hard going.

At the time of writing, the current HBOS share price has rebounded to around 320 pence, after slumping earlier in the week below the offer price of 275p.

The situation is clearly very volatile, clouded by the suspicion that some investors, so-called "short sellers", have been driving down the price of HBOS shares.

Not worth it?

For any of the two million or so small investors who are being invited to buy more shares, some things stand out.

If the price goes back down below the offer price, it would in fact be cheaper to go and buy the same number of shares in the open stock market at a lower price than they would have paid in the rights issue itself.

So it would be quite logical to say that it is not worth taking up this "bargain" offer.

To be fair to HBOS, when they originally set the offer price it was at a 45% discount to the then current share price and so it was offering quite reasonable value for shareholders.

However, since then the story of the UK mortgage markets has gone from bad to worse, which is crucial for HBOS as it includes the Halifax, the UK's largest mortgage lender.

The effect of this has been to see a dramatic fall in most bank shares and especially those involved in the mortgage markets.

Just to put this in some perspective, the share price stood at 608p on 1 April and then plummeted to below 275p in just a few weeks before staging a partial recovery. Ouch!

Normality returns

If things stay as they are, then the rights issue will proceed as normal and shareholders will have to make a simple decision - do they want to buy new shares at the offer price or not?

If you are suspicious, keep your hands on your wallet

To help them make this decision, this coming week they will receive the full prospectus from HBOS, which will include a trading update, and which I hope will give us an insight of the current business conditions.

I fear it may not make encouraging reading, but at least it may provide some comfort for the future medium to long term growth of the company.

If the prevailing share price falls below 275 pence again, I would not be surprised if they took the opportunity to re-price the issue at a lower price and try to tempt shareholders back to see if they will support the issue again.

So HBOS shareholders should hold hard for the moment and await further developments and news.

About 1.4 million shareholders who do not have share certificates have until Friday 11 July to decide if they want to take part in the rights issue.

Those who do have share certificates, about 640,000, have a week longer until Friday 18 July, in which to make up their minds.

Decisions, decisions

So, what to do?

If the share price stays significantly above the offer price then you could still consider applying.

If the company comes out with a reduced new offer price then it may be worthwhile.

However, if the price in the market is below, or barely above, the offer price then I would hold onto your cash.

In those circumstances HBOS could still go ahead with the issue as it has already been guaranteed by the issue's underwriters, Morgan Stanley and Dresdner Kleinwort, who in effect will put up any shortfall of the money not raised - which could be the full £4 billion.

For many people that would be a novelty as the last time that we had such a call on the underwriters was back in 1987 when they were lumbered with a large amount of BP stock after that issue flopped.

There is no guarantee with a rights issue that as a shareholder you will get value - and remember that you are giving your money on the basis that you trust the company to grow it for you.

If you trust them, go ahead. If you are suspicious, keep your hands on your wallet.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.