HBOS Rights Issue Shows Market Strain

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The FINANCIAL — HBOS PLC (HBOS.LN) said on July 21 that only 8.29% of shareholders had taken up its GBP4 billion rights issue, leaving Morgan Stanley (MS) and Allianz SE's (AZ) Dresdner Bank AG holding most of the new shares in a result that could discourage underwriters from taking on future financial services capital increases.

According to Dow Jones, the low subscription rate was attributed to the recent HBOS share price performance, which had slipped below the 275-pence-a-share rights issue price in recent weeks, giving shareholders no incentive to take it up.

THE BACKGROUND: A number of U.K. banks have needed to raise new capital to shore up balance sheets that have taken a battering in the current financial crisis.

The high level of new bank shares hitting the market and a continuing deterioration of market conditions has made it hard for underwriters to gauge the likely take-up.

WHAT NEXT: HBOS will get most of the GBP4 billion in funds it needs from its underwriters, who will now have to try to offload the shares they hold in the open market.

STILL TO COME: Shareholders in U.K. buy-to-let lender Bradford & Bingley PLC (BB.LN) last week approved its plan to raise GBP400 billion in new capital to plug a gap caused on its balance sheet by losses on its credit investments.

Like the HBOS issue, B&B shares have stubbornly loitered below the rights price, at 55 pence a share. The issue is underwritten by UBS AG (UBS) and Citigroup Inc. (C) but is also being backed by four of the lender's largest institutional investors, M&G Investment Management Ltd., Insight Investment Management Ltd., Legal & General Investment Management and Standard Life Investments.

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EARLY WINNERS: The banks who turned to capital markets earlier in the crisis have been more successful. The U.K.'s Royal Bank of Scotland Group PLC (RBS) last month successfully concluded a GBP12 billion rights issue, the largest such fund raising ever.

ALTERNATIVES: With rights issues under pressure, some banks have sought other sources of new capital by turning to cash-rich investors such as sovereign wealth funds.

Barclays PLC (BCS) on Friday completed a GBP4.5 billion rights issue that gave existing shareholders the option of taking up the offer, but which was also backed by big investors.

Only 19% of shareholders subscribed to the open offer and the remaining shares were to be allocated to Qatar Investment Authority, Challenger, China Development Bank, Temasek, some leading institutional shareholders and other investors.

After Barclays announced its capital raising plan, its shares fell as low as 238.8 pence compared with a rights issue price of 282 pence.



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