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HBOS cash call sets poser for small investors
BRITAIN'S biggest lender HBOS is asking its shareholders to stump up £4bn to help shore up its finances as it warns of tough times ahead and falling house prices.
The owner of the Halifax and Bank of Scotland has the largest small shareholder base in the UK and is keen to get its 2.1 million small investors involved in the rights issue.
These include 224,000 private shareholders in Yorkshire, many of whom became investors after Halifax demutualised in 1997 when they received an average windfall of 3,000 each.
There was a mixed response from small shareholders yesterday with some welcoming the offer which would allow them to buy two new shares at 275p each for every five shares they already own. This is a heavy discount to the closing share price last night of 487p.
But others were reluctant to invest hundreds of pounds in the bank at a time when many families are struggling with rising fuel bills, higher food prices and falling house prices.
The Halifax itself warned yesterday that UK house prices are expected to fall by about five per cent in 2008, below previous estimates of a drop of around three per cent.
One shareholder speaking at the bank's annual meeting yesterday said he did not want to throw more money at a bad investment, prompting applause from other investors.
Small investors hold a combined 770m shares, worth almost 4bn. Their average holding is 375 shares, so each will be asked for an extra 412 on average to maintain their stake in the company.
HBOS wants to raise 4bn as a prudent move to strengthen its balance sheet in the face of the tough economic outlook and a big jump in losses on risky assets.
Chief executive Andy Hornby said: "This capital raising means we can grow the business whether the weather is good or bad economically. The worldwide credit crunch has presented HBOS with challenges and we decided it would be prudent to strengthen our capital resources further."
The offer is underwritten so there is no risk for HBOS.
Experts said that many small shareholders may decide to ignore the offer as it comes only days after a 12bn rights issue from rival Royal Bank of Scotland. In addition HBOS shares have more than halved over the past year.
"Shareholders may reconsider their holding in its entirety," said Richard Hunter, head of UK equities at brokerage Hargreaves Lansdown. "I don't think there will be a massive exodus, but a lot of these private investors are in the same situation as everyone else with the twin threats of energy and food inflation, and it's another expense to look at."
Mr Hornby said HBOS is keen that small shareholders should get the same chance to apply for shares as large shareholders.
"I think the majority of shareholders will want to take up the rights," he said.
Shareholders have three options as illustrated in the case scenarios below – to take up the rights, sell them/let them lapse, or a third option which is referred to as tail swallowing whereby shareholders sell enough rights to pay for the rights of the remainder of their shares.
Mr Hunter said tail swallowing could be an attractive option against the tough economic backdrop: "At least there's only a partial dilution of the holding without having to spend any more money and I suspect that it may be the option shareholders would go for if they were aware of it."
HBOS's move is expected to add to pressure on other banks to follow suit with Bradford & Bingley and Barclays the likeliest candidates.
As expected HBOS also announced it was writing off 2.8bn from the value of its investments linked to the US sub-prime mortgage market and the global credit crunch.
The group will save about 650m by paying its interim 2008 dividend in shares, but plans to pay the final 2008 dividend in cash.
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Saturday 26 May 2012
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