What if HBOS Goes Ahead with a Right Issue?

Leeds_Fella

All

I have a lot of HBOS shares. Apologies for my niavity but:

What's your view on the impact on the current share price in the short term and long term?

Will it fall quite a bit tomorrow or rise?

amcluesent

IIRC, prices have risen when banks 'come clean' about the right downs/offs, plus there is some advantage to being first to suck up any available cash to restart the pipeline of lending.

That said, on a macro-scale we are in a sucker's rally, the market will go down a long, long way yet (IMHO of course)

Hemel_2

"HBOS does not comment on media speculation. The group has a strong balance sheet and significant capital resources at its disposal"

tradetime

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVTT5gTr2sMs&refer=home

Maybe significant capital resources at their disposal, but in times like these it never hurts to have a little more.

ianmr65

Companies have rights issues when they want to raise more money on the stock market. They offer to sell new shares at a stated price, usually below their current share price to make them attractive.

Typically, a rights issue is expressed as 'one for nine' or 'one for six'. What this means is for every nine (or six) shares you already own, the company will offer you one more at the special price. You can sell the rights (or even allow them to lapse) rather than take them up, but if you don't take them up your shareholding in the company will be diluted (because new shares are being issued).

The standard advice to investors not sure whether to take up a rights issue is to sell enough of the entitlement to finance the purchase of the remainder.
Eg

Shares in Company A are trading at £10 and you own 1,000 of them
The company has a one-for-ten rights issue, and sets the price of the new shares at £9.00

Your entitlement is therefore to 100 new shares at £9.00 each

If the entitlement to each new share is sellable at 50p, you can sell 93 of them, raise £46.50 and use that £46.50 to buy 5 of the new shares.

Note that the critical part of this operation is your ability to sell the entitlement to the rights issue itself. The only reason anyone would want to buy that entitlement is if the exercise price (£9.00) is below the current market price (£10.00)

So if the current market price falls below the excercise price the rights issue fails, but normaly the share price during the rights issue refects the ability of brokers to arbitrage margin, over the differentials, on the current, excercise, and option pricing.

As the share holding is dilluted. Then afterwards you would expect the share price to reflect the offer price. Howver from then on normal rules applies, and the shares may rise and fall as normal.

Companies on the up often do rights issues, not just to raise capital, but to help make the share price more manageable than 30000p per share or whatever. Dell, and ebay did this.

cheerfulcat

Hi, ianmr65,

ianmr65 wrote: »

Companies have rights issues when they want to raise more money on the stock market. They offer to sell new shares at a stated price, usually below their current share price to make them attractive.

Typically, a rights issue is expressed as 'one for nine' or 'one for six'. What this means is for every nine (or six) shares you already own, the company will offer you one more at the special price. You can sell the rights (or even allow them to lapse) rather than take them up, but if you don't take them up your shareholding in the company will be diluted (because new shares are being issued).

Best to credit your sources, in this case Incademy.

Companies on the up often do rights issues, not just to raise capital, but to help make the share price more manageable than 30000p per share or whatever. Dell, and ebay did this.

Are you thinking of a stock split, perhaps? Different animal altogether...

royeee

ianmr65 wrote: »

Typically, a rights issue is expressed as 'one for nine' or 'one for six'. What this means is for every nine (or six) shares you already own, the company will offer you one more at the special price. You can sell the rights (or even allow them to lapse) rather than take them up, but if you don't take them up your shareholding in the company will be diluted (because new shares are being issued).
<snip>
As the share holding is dilluted. Then afterwards you would expect the share price to reflect the offer price. Howver from then on normal rules applies, and the shares may rise and fall as normal.

Can you clarify how/why shares are diluted because of new shares?

ad44downey

Yes , because the total number of shares in the company has been vastly increased.

This is one rights issue to avoid like the plague IMO. You won't even get a proper interim dividend this year, they're going to give you even more shares instead! The housing market is just about to tank too and HBOS are the biggest mortgage provider in the country. Avoid!

digerati

royeee wrote: »

Can you clarify how/why shares are diluted because of new shares?

When the new HBOS shares are issued, the price of the existing shares moves down to adjust for the dilution effect of the rights issue. In fact it usually starts as soon as the rights issue announcement has been made.

For every five HBOS shares held, investors will be offered the chance to purchase two new HBOS shares. The new shares are being offered at 275p - a 45 per cent discount on today’s opening price of 495p.

So if you currently hold 1000 shares, you will be offered the right to subscribe for 400 new shares at 275p. If you take up the offer you will have to stump up £1100.

Hope this helps :-)

purch

Can you clarify how/why shares are diluted because of new shares?

errr............it doesn't answer that on Incademy

If the rights issue raises more Cash which is used to grow the Company, over the longer term the 'dilution' of Share value could be minimal or even reversed.

In a case like this, where a company needs the Cash to shore up it's Balance Sheet dilution of share value is much more likely, as the Cash isn't being used for anything bar saving the company from possible financial problems.

Bottom line.....if there are more shares on issue, and the underlying value of the business doesn't grow by an equivalent amount to the extra shares, then the price of the shares on issue will fall.

knights

Does anyone know when shareholders will be offered the new shares and when the option will have to be taken up by. Is there a site I can refer to to get this information?

regards