With shares in HBOS trading 6 per cent lower on Wednesday, here’s how the underwriters backing its £4bn cash call, Dresdner Kleinwort and Morgan Stanley, are planning to deal with the inevitable overhang of stock:
1. Subscription period ends on Fri, 18/07. BUT Accounts need to have their selections on rights in by 3pm UK time on We, 16/07. We believe most custodian deadlines are late morning on Wed. Rights trade nil paid for the final time on Wed. Pls advise your clients to check with their respective back office in order not to miss the deadline
2. Thursday-Friday - Rights trade fully paid, this means investors who own rights can still trade them and a buyer at that time would buy a “subscribed right” which should trades in line with stock. We therefore expect volumes to be extremely low.
3. The take-up ratio is expected to be announced by the company at the latest before markets open on Mon, 21/07.
4. The proportion not taken up, called the ‘rump’, is expected to be placed by the JBRs, acting as placing agents to the shareholders, on Mo, 21/07. However according to UK regulations, the rump can only be placed at £2.75 or higher, TO MAKE VERY CLEAR - RUMP WILL NOT BE OFFERED BELOW £2.75
5. If the JBRs believe that the shares cannot be placed at £2.75 or higher, there WILL NOT be a rump placement and the rump becomes what is called a ’stick’. The banks and the sub-underwriters (with no exception) become therefore owners of the stick shares
6. In the event of a stick, sub-underwriters will be allocated first on a pro-rata basis subject to their sub-underwriting allocations. The amount not allocated to sub-underwriters will be held by the JBRs
7. DKIB and MS will manage the stick together as is common practice in situations where underwriters are left with stock. The banks intend to manage the position with a clear objective of minimizing any price impact from a perceived overhang. As you know, both DKIB and MS think there is tremendous value at 275p and will manage accordingly.
FOR THE LARGE SHORT BASE: There are mainly 3 ways to close out their shorts: (i) either by buying rights and exercise them or (II) by buying shares in the rump (if any) or (iii) by buying the shares in the markets before or after the end of the rights issue. Most HFs in shorting the stock hedged that short through many usual mechanism. In any event if they do not buy the stock now or exercise the rights, their currently hedged shorts will become naked directional shorts with potential for a short squeeze
