June 16, 2008 | posted by Pam Atherton in Banking, Investments, Mortgages |

Given the recent gyrations in HBOS’s  share price, private investors could be forgiven for giving the company’s upcoming rights issue a definitive thumbs down.

Heavy shorting of the shares last week drove the HBOS price briefly below the rights issue price of 275p, causing alarm at HBOS HQ, its underwriters and shareholders.

The bank, whose shares are down around 70 per cent in the past year, has 2.1m retail shareholders who hold 27 per cent of the company. They are unlikely to take up their rights if the share price does not stay well above the rights issue price and recover some poise.

But following the FSA’s dramatic move on Friday to support companies conducting rights issues, HBOS shares rose to 329.25p this morning, indicating that the regulator’s action may have had some effect already.
 
By introducing a requirement that anyone short selling more than 0.25 per cent of the outstanding shares of a company conducting a rights issue must disclose their short position from this Friday [20 June],  the FSA hopes to inject some stability into the market.  
 
But the situation remains volatile and if the price goes back down below the offer price, it clearly would be cheaper for private investors to buy the shares in the open market.

Justin Urquhart Stewart of stockbrokers 7 Investment Management comments: “To be fair to HBOS, when they originally set the offer price, it was at a 45 per cent discount to the then current share price and so it was offering quite reasonable value for shareholders.

“However, since then, the story of the UK mortgage markets has gone from bad to worse, which is crucial for HBOS as it includes the Halifax, the UK’s largest mortgage lender.

“The effect of this has been to see a dramatic fall in most bank shares and especially those involved in the mortgage markets.  Just to put this in some perspective, the share price stood at 608p on 1 April and then plummeted to below 275p in just a few weeks before staging a partial recovery.

“If the prevailing share price falls below 275 pence again, I would not be surprised if HBOS took the opportunity to re-price the issue at a lower price and try to tempt shareholders back to see if they will support the issue again.”

The  1.4 million shareholders who do not have share certificates have until Friday 11 July to decide if they want to take part in the rights issue.

The 640,000 shareholders who do hold share certificates have until Friday 18 July to make up their minds.

So what to do?
If the share price stays significantly above the offer price, then you may wish to consider applying.  If the company comes out with a new reduced offer price, then it may be attractive. But if the price in the market is below, or barely above, the offer price then it is hard to make a case for investment.