HBOS confirmed that it will raise £4bn via a two-for-five issue priced at 275p a share - a 45% discount to Monday's close of 495.75p and a 36% discount to the stock's theoretical ex-rights price of 434p, with the value of right at 61.8p.
The lender will also rebase its dividend payout ratio to 40% from 46% last year, with the interim 2008 dividend to be paid in shares rather than cash.
Including tax, write-downs totalled £3.65bn on its impaired securities for the first quarter.
HBOS took a fair value adjustment of £970m net in the trading book for the year to date, which goes through the profit and loss account, and a further £1.87bn taken via the balance sheet, which has no impact on regulatory capital. Management called the moves "adjustments" rather than write-downs, as it believes the downgrades will reverse over time.
The bank targetted a tier 1 capital ratio of 8-9%, at the top end of the UK sector, with a core tier 1 ratio of between 6-7%. That compares with RBS's target of 6% post its £12bn cash call.
"We are planning for a more challenging environment ahead and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further," said Chief Executive Andy Hornby.
Analysts at KBW calculated that the rights issue cuts pro-forma EPS of 70p in 2008, from 96.7p, and to and 70p from 96.0p in 2009. On an ex-rights rights price of 433p, the new earnings multiples equate to 6.2 times 2008 and 2009 earnings, and 1.0 times 2008 net asset value, according to the broker.
However, forecasts are likely to fall. In a trading update, While Hornby called HBOS's performance so far this year as "satisfactory", he talked of slowing volumes, difficult margin conditions and rising impairments. Reference was also made to lower corporate realisations and difficulties in Irish and Austrailian businesses stemming from the global financial turmoil.
Gross retail mortgage lending in the first quarter was down about 20%, but redemptions and a slower market will lead to modest asset growth, HBOS said. A broadly stable margin was guided for 2008, with impairment losses showing some increase as mortgage charges increase.
Alex Potter, at Collins Stewart, said this amounted to a profit warning that will take about 10% off forecasts.
"The key areas are the ISAF business (private equity-style business) and core retail. The latter is reportedly showing a weak mortgage market share and likely rising mortgage impairments," he told clients. "Unsecured lending will be flat and management still contends that impairments will continue to fall in this area to, at least partially, offset mortgage losses. We feel this could be too optimistic.
"ISAF has been the largest part of revenue growth for the last two years and its fall is unquantified, which we take negatively. We believe group revenue growth could be negative in 2008 and, even with stabilising margins, again in 2009. Cost cuts will help but the growth outlook is very weak."
Deutsche Bank's Jason Napier retained "hold" advice. He commented: "With HBOS expecting to put £970m of the charge through the P&L, pro-forma core and total tier 1 ratios should be ~6.9% and ~8.8% respectively, dealing with solvency as an issue for HBOS, we believe.
"Twenty-eight per cent EPS dilution leaves the stock trading at 6.1 times our 2009 EPS estimates and at 1.2 times tangible book value per share. We expect substantial pressure on earnings forecasts to keep long-only investors cautious (given the likelihood of further deteriorating credit conditions), but think it will become increasingly difficult to justify maintaining short positions."
HBOS has £7bn in Alt-A investments in its £41bn mortgage-backed securities portfolio - the same type of paper Royal Bank of Scotland last week devalued by about half. It also has £3.3bn of commercial mortgage-backed securities and £3.2bn of collateralized mortgage obligations.
The lender had previously written down its potentially toxic assets by just 2% in 2007, taking a £227m hit at its full-year results
"It appears that HBOS has seen the light, since its full year results on 27 February, regarding its optimal capital position," said Nic Clarke, an analyst at Charles Stanley. "However, unlike RBS it does not need to undertake a rights issue because its write-downs have deteriorated so badly in the month of March. According to HBOS its Treasury portfolio is still very solid. HBOS is doing a rights issue simply because it believes that those banks with a superior capital position will outperform less well capitalised banks over the next three to four years.
"Indeed, the rationale on this occasion is in sharp contrast to why it raised capital in 2002. That was done to allow it to grow its asset base. On this occasion HBOS has stated that it actually plans to reign in its asset growth. The other reason that HBOS states that it is doing a rights issue is that its view of the macro-economic outlook has deteriorated.
"At the time of the full year results it expected house prices to remain flat in 2008, now it expects them to fall by 5% in both 2008 and 2009.
"However, HBOS current capital position is less stretched than some of its peer group, also if current consensus forecasts are correct, then the Group should generates ignificant cash in 2008 and 2009 and HBOS also expects its fair value adjustments to be reversed over time. Therefore, it does look as though this rights issue is a bit of a luxury at the expense of return on equity with a new target of mid teens rather than nearer 20%. However, if the UK economy and housing market do deteriorate markedly, then HBOS’s relative capital strength will prove to be a clear plus point and the rights issue will be seen as a wise decision."
Hemscott's verdict: Wonder how the Financial Services Authority's investigation into trash and cash is progressing?
Readers able to remember back to March may recall that HBOS shares dived 18% in a morning on assorted rumours about the strength of the lender's balance sheet. Such talk was "complete and utter nonsense" and was "totally unfounded and without a shred of substance whatsoever", a spokesman said at the time.
Less than six weeks later - and after several days of blatant press leaks - shareholders are being tapped for £4bn and lose their dividend after HBOS warns on profits and says it would be prudent to shore up the balance sheet.
The FSA would be better advised to stop wasting time worrying about fictional short-sellers and take a good look at its rules of timely disclosure and creating a false market. It may find some real problems much closer to the boardroom.
