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A couple of weeks ago, the City was agog as the share price of Bradford & Bingley dropped towards the level of its planned rights issue.
If the shares fell below the planned issue price, then no one would buy them. The underwriters would be on the hook for the whole £300m. What would happen then?
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In the event, a catastrophic profit warning gave the underwriters the excuse they needed to wriggle off the hook, though the City is not best pleased about it. The rights issue price was slashed, and the major banks corralled to sub-underwrite a big chunk of the deal.
A fair old drama over £300m. So I'm wondering how the City will react to the fact that HBoS's £4bn rights issue looks like it'll have similar troubles getting away
Banks and housebuilders took an absolute kicking on the markets yesterday. Both sectors have been in trouble all this week as investors and analysts have finally woken up to the fact that this housing crash will be nothing like the 1990s. It'll be much, much worse.
On that note, before I forget, we've just held our latest property round table discussion here in the MoneyWeek office. The full transcript will be published in next Friday's issue, but I have to tell you right now, you'll be staggered by just how far one high-profile former property bull told us he reckons that prices could fall this time round. Even our own regular property bear James Ferguson hasn't made a prediction this gloomy. You really need to read this - if you're not already a subscriber, subscribe to MoneyWeek magazine.
Back to the story. So now the City boys have taken the blinkers off, analysts have been issuing brutal (by their standards) research notes and share prices have been in freefall. This hasn't been helped by rumours that a hedge fund which had been punting on housebuilders had gone bust, and was being forced to close out its positions.
HBoS closed 17p below the rights issue price yesterday
HBoS has seen its share price fall almost in half in the past seven weeks. And after yesterday's plunge, they closed at 258p, a full 17p below the 275p rights issue price.
What does that mean for the rights issue? Well, it's pretty simple. If I said to you "Psst. I've got £2.50 here in my pocket. I'm willing to sell it to you for £2.75," you'd think I was daft. And it's exactly the same for HBoS shares. They're selling in the open market for £2.50, which makes it highly unlikely that any shareholder in their right mind will jump at the chance to snatch them up for £2.75.
So where's that £4bn going to come from? That's right the underwriters. That's their job after all. And HBoS doesn't look like it plans to do any Bradford & Bingley-style U-turns. Yesterday it issued a statement to confirm that trading and mortgage arrears remained "in line with the group's expectations" and that the "fully underwritten rights issue is proceeding according to plan".
Note the emphasis on fully underwritten'. So it looks like Morgan Stanley and Dresdner Kleinwort might be earning their £80m to £100m fee after all. That would leave a big chunk of the company in the hands of the underwriters nearly 30%. As The Telegraph's Damian Reece points out, that might be tempting for a Chinese sovereign wealth fund looking to get mass exposure to the British property market. Lord knows, they've made enough dud investments in the recent past (buying a big chunk of US private equity group Blackstone at the top of the bubble for example) one more wouldn't hurt.
While it looks like underwriters will have to do their duty as far as HBoS goes, those who are paid to take risks in other sectors seem to be trying to run away as fast as they can.
What's the point of insurance that only covers you in the good times?
ScS Upholstery, the sofa retailer, saw its share price cut in half yesterday on the news that five of its 14 suppliers have had their credit insurance cover withdrawn. Credit insurance covers a supplier against the risk that one of its customers won't pay them for their stock. In other words, it insures a supplier against the risk of a retailer going bust.
So the fact that some ScS suppliers can't get insurance isn't a huge vote of confidence in the company. Now this isn't an area I'm intimately familiar with, and I'm sure one of my more knowledgeable readers will no doubt explain it to me but what's the point of having insurance if it gets yanked away when you most need it? It's that old adage about the banks throwing umbrellas at you when it's sunny then demanding them back when it rains.
It seems that companies were only willing to take risks when it seemed that risk had vanished from the markets and the economy forever. Now that it's making a comeback, everyone wants to walk away from their responsibilities.
Just before I go, a quick update on the idea for the proposed Asia newsletter that I emailed you about a month or so ago. We had a good response too many to reply to individually, unfortunately, but all of your feedback was much appreciated - and we're working on it right now. That's all I can say for now, but I'll have more on this very soon.
Turning to the wider markets
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UK shares had a poor day, with the FTSE 100 index plunging 104 points to 5,723, a 1.8% slip and its lowest point since the end of March. Recent underperforming sectors like banks and housebuilders continued to take a pounding, with HBOS sliding to 258p, well below its right issue price, and Barratt Developments crumbling 20% to 73p.
Retailers also suffered, with Next losing 7% and DSG 14%. Oil stocks managed to defy the falls as the spot price stayed firm.
European markets also fell, with the German Xetra Dax easing 1.8% to 6,650 and the French CAC 40 being crunched 2.1% to 4,661.
Wall Street had another bad day, with the Dow Jones Industrial Average dropping 206 points to close 1.7% lower at 12,084, while the wider S&P 500 performed just as badly, losing 23 to end the day at 1,335. The tech-heavy Nasdaq Composite fared even worse, shedding 55 to finish 2.2% down at 2,394.
Overnight, Asian markets followed US lead, with Japanese stocks sliding 2.1% as the Nikkei 225 lost almost 300 points to 13,889, while in Hong Kong, the Hang Seng declined 1.8% to 22,902.
Brent spot was trading this morning at $135, while spot Gold was at $871. Silver was trading at $16.61 and Platinum was at $2015.
In the forex markets today, sterling was trading at 1.9537 against the US dollar and 126.63 against the euro. The dollar stood at 0.6482 against the euro and 107.53 against the Japanese yen.
And this morning, Carphone Warehouse shares took a pounding as the group warned that broadband sales growth might be lower than expected this year. Chief financial officer Roger Taylor said "there's a recessionary feel" about the economy.
Our recommended articles for today:
When talking about the sky-high oil price, many commentators focus on production, not exports. But why do so many oil-producing nations quickly reduce their exports to become net importers of oil?
City analysts failed dismally to forecast what was obvious to many of us: the house price crash, the dramatic increase in oil prices. So why should we listen to anything they have to say?
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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