HBOS cash call in crisis after shares fall below rights issue price

HBOS cash call in crisis after shares fall below rights issue price

Shares dived through the 275p level at which the Halifax and Bank of Scotland group is trying to convince its shareholders to support a rights issue it needs to bolster its capital base.

The shares ended the day at 258p, down almost 12%. Other bank shares also touched new lows. Royal Bank of Scotland, which issued a subdued trading statement yesterday, ended at 212.2p, down 9% and barely above the 200p at which its rights issue, which ended last week, was priced. Alliance & Leicester ended 8% lower and Barclays was 4% down.

The Financial Services Authority, which is investigating possible manipulation of share trading in HBOS in March, said it was monitoring the situation. "The FSA is keeping elements of the banking sector under close scrutiny," a spokeswoman said.

The slide in the HBOS share price means that investors have little reason to support the bank's cash call as it is cheaper for them to buy the shares in the market. The rights issue was initially priced at a 45% discount to the closing price of 495.75p on April 28, the day before it was announced. At the time chief executive Andy Hornby, who is now facing a severe test of his stewardship, said the money was needed because of a "more challenging period ahead".

Mindful of the unprecedented.....continued below

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HBOS stressed that its rights issue was fully guaranteed - underwritten - by investment bankers at Morgan Stanley and Dresdner Kleinwort, which means it will get its cash regardless of what its shareholders decide. Caught up in concerns about the housing market sparked by figures from surveyors' body RICS showing house sales at their lowest since its records began in 1978, HBOS promised a detailed trading update next week.

It tried to distance itself from events at B&B, which stunned the City last month with a profits warning caused by more mortgage customers going into arrears.

At 3.30pm HBOS told the stockmarket: "Further to its statement dated 1 June 2008, HBOS confirms that its fully underwritten rights issue is proceeding according to plan and that it will issue a prospectus and detailed trading update week beginning 16 June 2008. Current trading, and specifically mortgage arrears performance, is in line with the group's expectations."

At the time its shares had dipped only 0.5p below the rights issue price. But the statement failed to push the shares higher, and they fell a further 16.5p.

HBOS's insistence that its underwriters were standing behind its rights issue is in sharp contrast to B&B, whose underwriters at Citi and UBS cut the price at which they would guarantee the share issue to 55p from 82p after learning of a deterioration in its trading.