Fewer than 9% of HBOS’s shareholders took up their rights in the bank’s £4 billion rights issue, priced at a 45% discount to the bank’s share price at the time of launch, and only 18% of Barclays’ existing shareholders took up the shares offered to them in a clawback.
Investors rejected the deals as shares in the banks and indeed the sector suffered roller-coaster dips, plunging them below their offer prices, following bad news on the housing front and disappointing earnings announcements.
Although the rejection from existing shareholders didn’t bother Barclays too much because it had pre-placed the transaction with a few strategic investors, and HBOS received its proceeds, Morgan Stanley and Dresdner Kleinwort, which underwrote the HBOS deal, each appeared to have been left holding shares worth £770 million (5% of the offer) in the UK’s biggest mortgage lender, after a rump placement and after having passed off about 40% of the deal to sub-underwriters.
According to new compulsory filings about short positions with the Financial Services Authority, however, it has emerged that Morgan Stanley’s trading desk went short as much as 2.35% of HBOS after the rights issue closed, an above-the-board move that has been cleared by the FSA.
Although there is some concern about the scale of HBOS’s exposure to the US and UK mortgage markets and about the amount of medium-term paper that the bank will have to refinance this year, ECM bankers lay the blame for the deal’s failure with its huge lead time.
|
A downhill ride to a rights issue |
|
HBOS share price in sterling, 2008 |
 |
|
Source: Reuters |
HBOS announced the terms of its rights issue at the end of April and took so long to complete because the bank wanted to release a trading statement and call an EGM beforehand. The long lead time left the deal exposed to a highly volatile market.
A London syndicate banker says: "The banking sector market has gone from being focused on the scale of write-downs being made and the amount of capital needed to solve these historical problems to new concerns about whether previous write-downs were adequate and to questions about future earnings. The steady accretion of bad news has hurt those banks that have been slow to come to the market. The length of the subscription period hurt HBOS because share prices throughout the sector were falling and it couldn’t subsequently change the terms of its offer to reflect this."
A head of EMEA equity capital markets in London says the failure of HBOS’s rights issue is likely to leave a lasting impact on future deals.
"This sort of episode is likely to influence the terms at which underwriting is made available," he says. "In these circumstances, all market participants want confidence that deals will get done and this will intensify the search for ways to maximize confidence in the success of transactions. Getting the support of core shareholders, for example, sends a powerful message and is one good way to ensure that deals get done. Given market conditions, potential issuers are also likely to look at other options, such as disposals, before launching a rights issue."