大象传媒

Underwriters short HBOS

• Robert Peston
• 21 Jul 08, 08:56 PM

Morgan Stanley and Dresdner succeeded in placing a further 29.5% of the new HBOS shares, worth 拢1.2bn, during the course of the day. Which is no mean feat.

But that still means that Morgan Stanley, Dresdner and the sub-underwriters have been stuffed with 62%, worth 拢2.6bn.

I would say ouch. But here's the real feat.

As I understand it, neither Morgan Stanley or Dresdner will emerge with a disclosable stake in HBOS, viz a stake of 3% or more.

How so? Well after the rights closed at 11am on Friday, they were both allowed to take a short position in HBOS, to cover themselves against a future fall in the HBOS share price.

So they duly shorted HBOS in massive size. I understand Morgan Stanley took a 2.4% short position in the mortgage bank - which is huge.

Clever old Morgan Stanley and Dresdner have won brownie points from HBOS for not wobbling during the fund-raising, even though it was blowing a gale in markets.

And after fees, the HBOS short-positions, and other hedges (including, as I mentioned earlier, a short position for Morgan Stanley in Royal Bank of Scotland), they may even end up with a profit on the deal.

But here's what I find a little bit odd - that they were allowed to short HBOS's shares, at a time when the market was unaware of the full extent to which the rights issue had flopped.

On Friday, Dresdner and Morgan Stanley both knew that existing shareholders had shunned the rights issue, since they were organising the share sale. But the market was only given the information this morning.

That information was - in theory at least - highly price sensitive. You'd think therefore that both Dresdner and Morgan Stanley would be banned from dealing in HBOS on their own account till the market had been told the extent of the rights take-up.

But apparently no such prohibition applied. Which reinforces my view that the current rules relating to rights issues are - to put it mildly - utterly bonkers.

• Permalink
• Comments (0)

Taxing the immobile

• Robert Peston
• 21 Jul 08, 04:26 PM

The Treasury has ditched controversial proposals to raise additional tax from companies that locate intellectual property, such as drug or technology patents, in low-tax countries.

But it has simultaneously postponed plans to abolish the tax that companies pay on dividends they receive from their respective overseas operations.

The Treasury's decision to ditch the controversial tax reform is just the latest example of how difficult it is for any government to raise tax from big businesses, since in a globalised world they always have the option of relocating abroad.

That's why the burden of taxation is being shifted in many major economies to taxes that "stick" - notably taxes on consumption and on the income of individuals and small businesses, which find it relatively hard to relocate abroad.

But as the economy slows down, it is becoming harder and harder for the Treasury to increase taxes of any sort - which is why it is considering changing the fiscal rules, which restrict how much it can borrow to fund public services.

Many big companies are likely to welcome the Treasury's change of heart, which is set out in a letter sent in the last few minutes from , a Treasury minister, to the employers' lobby group, the CBI, and to the 100 Group (which represents the finance directors of the UK's biggest businesses).

A number of multinationals had warned that their tax bills would rise to unacceptable levels if the Treasury were to tax earnings generated abroad from patents and other forms of intellectual property.

Some threatened to move their headquarters overseas to escape the incremental tax.

A Treasury official said that the government had been surprised by quite how many companies feared they would pay additional tax.

Companies as diverse as the world-leading drinks group, Diageo, and the advertising giant, WPP, had been muttering about moving their domiciles out of the UK to lower-tax countries.

However, WPP's concerns were not about the taxation of intellectual property but about a related reform to rules concerning "". It is unclear whether WPP's fears will be allayed.

The shadow chancellor, George Osborne, accused the Treasury of "another u-turn". Mr Osborne claimed that Alistair Darling had made seven u-turns in the year since he became chancellor.

However, the Treasury denied that there had been a U-turn. It said that a proposal had been put out for consultation and that it had responded to what business wanted.

The Treasury had been keen that the Exchequer should benefit from profits earned on patents and products developed in the UK, often with the help of UK government subsidies. It feared that some companies were developing valuable patents in the UK and then registering them offshore for tax purposes.

As a quid pro quo for levying this additional tax, it was offering to exempt from tax all cash repatriated to the UK in the form of dividends from overseas subsidiaries.

UPDATE 17:44: The Treasury hasn't allayed the fears of the likes of WPP and possibly also Diageo. Because the technical notes to the letter sent today by Ms Kennedy imply that Her Majesty's Revenue & Customs still wants to get its mits on earnings attributed to controlled foreign companies in tax havens such as Luxembourg and Leichtenstein.

So the Treasury can't yet be confident that the threatened exodus of British multinationals is off the agenda.

• Permalink
• Comments (0)

HBOS humbled

• Robert Peston
• 21 Jul 08, 08:31 AM

's 拢4bn rights issue has been an absolutely colossal flop.

It is, in fact, the quintessence of a flop.

The deal will probably enter the City lexicon as the phrase "doing an HBOS", to mean how not to raise money - though that would be unfair, because HBOS is the victim of a rights-issue system that is cumbersome and slow (and should therefore be reformed).

But here's the important point.

HBOS has got its money, some 拢4bn.

So this is not a case of an important bank being deprived of vital capital.

What's happened is that its own shareholders don't want the new shares, or at least they want only 8% of them.

Shareholders cold-shouldered the sale because the price of HBOS shares (and other banks' share prices) plummeted at the make-your-mind-up moment last week, after the woes of Fannie Mae and Freddie Mac took investors to the brink of nervous breakdown.

The remaining 92% of HBOS rights shares will go to the underwriters, unless they can be placed in the market over the next couple of days.

That means about 拢2.2bn of stock will be shared between just two investment banks, and (they kept about 60% of the underwriting on their own books, and distributed about 40% to other investment institutions).

Here's what's irksome for HBOS.

Underwriters like Morgan Stanley and Dresdner are reluctant buyers of shares in these circumstances, not long term investors - even though both have hedged their exposure to HBOS and are therefore not facing colossal losses.

The market knows that the underwriters would want to sell their stock at the earliest opportunity, which would keep HBOS's shares under downward pressure at a time when the weak housing market is doing quite enough to depress its shares.

So HBOS is keeping its fingers and toes crossed that investors who actually want to hold its shares can be persuaded to buy in the coming hours.

To digress for a second, the way that the likes of Morgan Stanley and Dresdner hedge or lay off their underwriting exposure raises some jolly interesting questions. If for example a Morgan Stanley short-sells stock in another bank as a hedge, that short-sale can have the effect of actually depressing HBOS's share price, however brilliant Morgan Stanley may believe it is in neutralising contagion.

That said, Morgan Stanley and Dresdner have shown significant backbone in backing HBOS in a financial climate that's probably as bad as it could possibly have been. They did not wobble in the way that did a few weeks ago during 's turbulent fund-raising.

• Permalink
• Comments (0)