HBOS shares recovering after 11% slide
Shares in HBOS appear to be on the road to recovery today after an 11% nosedive yesterday (12 June 2008), which left a question mark over the bank’s shareholder rights issue.
The banking giant's cash call will see shareholders offered two new shares for every five existing shares held at 275p each, as it attempts to strengthen its balance sheet. However, it could do little to stop its shares closing at 258p yesterday, well below the 275p barrier at which its rights issue is priced.
Although the share price has nearly recovered today – currently trading around the 272p mark – experts say that there may not be a full investor take-up of the rights issue if prices fall again before the deadline of 11 July.
HBOS, which has the biggest non-institutional shareholder base in the UK, offered reassurance yesterday as its share price dived, pointing out that the rights issue is fully underwritten by Morgan Stanley and Dresdner Kleinwort. This means these firms promise to buy the new shares if investors choose not to. However, if this occurs then Morgan Stanley and Dresdner Kleinwort would be left with a 29% stake in the bank.
Graham Spooner, an investment adviser at the Share Centre, says this would be an embarrassing turn of events for the bank. “Although the rights issue will go ahead indefinitely, I’d certainly expect the underwriters to be sweating over the next two to three weeks. However investors may yet be tempted to register their interest.”
But Kevin Pattinson of Southampton-based P&P Invest, believes that investors thinking about taking up the rights issue need to take a long-term view. “With the markets as they are, getting a quick return will undoubtedly be hard,” he says. “But a company of the size and structure of HBOS is more than capable of making a profit, and the underwriters know this.
“Although it can be difficult on a psychological point of view to see the share price slide on the short-term, investors need to weigh up what is good value, and I believe these options offer the opportunity for investors to make a reasonable return over the long term.”
Shares in HBOS were not the only ones in the banking sector to take a tumble yesterday. The Royal Bank of Scotland, which has already secured 95% of its planned £12 billion rights issue saw its shares fall by 1.78% at close.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.