HBOS Shares Go Unsold

HBOS, Britain’s biggest home lender, tried to raise funds through an emergency rights issue, £3.8 billion worth. It managed to sell just 8.3% of the shares. Because the issue was underwritten by Morgan Stanley and Dresdner Kleinwort, HBOS will get the money to clean up its books. However, the underwriters are stuck with millions of shares that will take forever to get off their books.

Shane O'Riordain, a spokesman for HBOS, told Reuters, “The rights issue was conducted in the middle of a fierce financial storm, we saw unprecedented volatility in bank stocks. The bottom line from an HBOS perspective is we’ve raised 4 billion pounds of capital, which means we will now be one of the most strongly capitalized banks. That’s where we want to be at a time when the economic outlook is darkening.”

As for the underwriters, Reuters says, “Morgan Stanley and Dresdner are estimated to have sub-underwritten about 40 percent of their holding, but that would still leave each of them with over 1 billion pounds of HBOS shares, or an 8 percent stake. They would have hedged much of their remaining exposure and lined up institutional investors to mop up stock at a discount, bankers said. The extent to which they have long-term buyers lined up could dictate how the stock overhang affects HBOS's share price.” They’re putting a brave face on it. “Our extensive due diligence and management of the current risk makes us comfortable with our valuation of, and holding in, HBOS,” a Morgan Stanley spokesman said in an e-mailed statement. “HBOS is a sound bank with diverse income sources.”

If there is any demand in the future for the stock, it will come from the hedge funds that were shorting the it. James Hamilton, analyst at Numis Securities, told the wire service, “There were a large number of hedge funds who shorted the stock with the intention of buying it back off the underwriters at a discount and it looks like they're going to get their way.”

Regardless, this failed offering is a sobering bit of UK property news. People don’t want to invest in HBOS under these circumstances. That means the perception of the UK property market is still shaky, and that undermines the banks. Julian Chillingworth, chief investment officer at London-based Rathbone Brothers, said, “The message is loud and clear. People still don't really want to buy banking stocks.”

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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