Holders of more than 90% of HBOS shares have refused to stump up cash in the bank's £4bn rights issue, turning it into one of the biggest fund-raising flops in corporate history.
Does it matter?
Not really. HBOS has raised the £4bn it was looking for because it asked Dresdner Kleinwort and Morgan Stanley, two investment banks, to underwrite the issue of new shares. This means they acted as guarantors to ensure the lender received its money. But the lack of support from shareholders will be an embarrassment for the HBOS management, led by chief executive Andy Hornby.
Why did shareholders refuse to buy more shares?
When HBOS announced its rights issue on April 29 it priced the new shares at 275p - a near 50% discount to its then share price. Its management and advisors cannot have expected its share price to more than halve in just two months. HBOS was not alone - the same happened to many other banks as investors became concerned about the state of the economy, the slowdown in the housing market and the possibility of write-downs on investments hurt by the credit crunch.
What do small investors in the bank do now?
If the HBOS share price had risen steadily until 4.30pm tomorrow, there was a chance they might have received a cheque. This as the deadline for the underwriters to find new buyers for the left-over shares. If they had been able to place the new shares at a price higher than 275p - the price of the cash call - they would have to send the profit to the current shareholders, after taking a £5 commission from each shareholder. However, just after 4pm today the underwriters decided they had placed all the shares they could and shut the placing of what is known as the rump. They also admitted there would be payment to shareholders who had not taken up their rights.
Sounds a bit odd. Why would investors have been entitled to anything?
It's because the fundraising was structured as rights issue. These have been designed to ensure that all investors are treated equally when companies raise cash. This means that the shares being placed on the market technically belong to the shareholders to whom the "rights" are attached.
What will HBOS do with the cash?
It will keep it in its coffers to bolster its regulatory capital. Its core tier one capital ratio, used by regulators to measure financial strength, should rise to between 6 and 7%.
Have other banks raised funds?
Royal Bank of Scotland got the ball rolling in mid April when its announced a record-breaking £12bn rights issue to push its core tier one capital ratio to 6%. Barclays avoided a rights issue and raised £4.5bn of funds by calling in new investors from overseas. Bradford & Bingley is still in the process of raising £400m through a rights issue. Alliance & Leicester is receiving a cash injection from Spanish bank Santander which has launched an audacious bid for the lender.
