PLANS by HBOS to raise billions of pounds from its shareholders came under fresh pressure yesterday after the bank suffered its second day of sharp stock market falls.
The 5 per cent slide – wiping more than £500 million from HBOS's market value – added to Thursday's near-7 per cent drubbing, which followed a trading update revealing further writedowns and bad debt warnings.
Last night's closing price of 282.25p
put the stock within sight of the discounted 275p being offered to investors under the bank's £4 billion investor cash call.
While the market in general was weak following rumours of a profit warning from Merrill Lynch, HBOS also suffered from a string of price target downgrades amid expectations of heightened bad debt pressure.
HBOS chief executive Andy Hornby, right, has been keen to stress that the rights issue is on track and is fully underwritten, but the fresh declines cast doubt over the level of investor appetite. The group has a large private shareholder base with about two million investors.
If demand is low, the banks underwriting the rights issue could be left with substantial shareholdings to shift with the potential for hefty losses.
HBOS shareholders are set to vote on the scheme next Thursday in Edinburgh, with an 11 July deadline for them to confirm their interest, assuming the rights issue is given the green light.
Although shares in the bank recently fell below 275p, they recovered after the Financial Services Authority (FSA) proposed new rules for short-selling during rights issues.
On Thursday, HBOS sought to reassure that trading was "satisfactory", but the City took fright at news of increased writedowns and the potential for rising bad debts amid a worsening outlook for UK house prices.
Analysts at Citi yesterday said the bank risked losing its higher-quality borrowers as they shop around for better rates and could be left with a riskier borrowing base.
"Ten months since the start of the credit crunch in August 2007, the newsflow surrounding HBOS continues to worsen," the analysts said.
"Rising mortgage arrears in the first five months of 2008, combined with rising impairment losses and significantly reduced investment realisations in corporate banking, lead us to make further material earnings downgrades."
The bank's exposure to the housing and property market through £4.2bn in loans and investments to the sector has also led to fears for the group.
Meanwhile, both Credit Suisse and Lehman Brothers cut their price targets on HBOS yesterday after this week's trading statement warned that first-half writedowns would reach just over £1bn.
Credit Suisse cut its target price on HBOS to 370p from 450p and kept its "underperform" stance, while Lehman's target price fell to 320p from 520p, with its rating maintained at "underweight".
Both brokers cited the uncertainties highlighted by the trading update.
New rules imposed by the FSA, which came into play yesterday, are designed to smooth the process for companies raising cash from rights issues.
Investors now need to reveal any short positions over 0.25 per cent in firms undertaking such moves, under guidelines outlined a week ago.
Short-sellers, often hedge funds, sell borrowed shares in the market in the hope of buying them back more cheaply at a later date. During a rights period, trading can be more volatile and losses accelerate if shares fall below the issue price.
The FSA's move has drawn criticism from the hedge fund industry.
