HBOS says independence equals nationalisation
HBOS's board has this afternoon explained why it sees the independence of the bank as a highly unattractive option.
In a document sent to shareholders about its plan to raise £11.5bn of new capital and to be taken over by Lloyds TSB, it says that it would need to raise more capital were the deal with Lloyds to collapse, by order of the City watchdog, the Financial Services Authority.
What HBOS calls a "preliminary indication" from the FSA - given a few weeks ago - was it would need to raise £12bn as an independent bank, a 4.3% increase on the amount HBOS is currently raising.
But HBOS fears it may have to raise rather more and on worse terms, were it to go back to the Treasury at this later stage and reopen negotiations on the fund raising. It tells shareholders there is no certainty about quite how much additional capital it would need to raise.
The letter to shareholders from HBOS's chairman, Lord Stevenson, is pretty alarming, It warns that independence could lead to "the loss of private sector status", or de facto nationalisation.
HBOS fears that all the increased capital would probably have to come from taxpayers - and that would give the state a large majority shareholding in the bank, perhaps of 70% or more.
Which explains why HBOS has rejected calls from the prominent Scottish bankers, Sir George Matthewson and Sir Peter Burt, for HBOS to remain independent.
UPDATE 06:00 PM
Some, such as Burt and Matthewson, will say that HBOS doth protest too much about the risk of the business losing its private sector status and becoming a nationalised bank.
After all, HBOS has confirmed what Burt and Matthewson contended, that the FSA had originally said that an independent HBOS would need only a few hundred million extra pounds of capital.
So for HBOS's case to be taken over by Lloyds to remain totally and utterly compelling, its chairman Lord Stevenson needs to demonstrate that he is right to fear that the FSA would now demand that the bank raise more capital and also that the Treasury would provide this capital on worse terms.
Shareholders may insist that he prove that he is not being alarmist.
Which in turn probably requires that the Treasury and the FSA both come out of purdah and state precisely how much capital they would want an independent Lloyds to raise and also the price of that capital.
PS This is the important part of the HBOS document:
7. Importance of voting
The HBOS Board unanimously recommends that shareholders vote in favour of the resolutions required to implement the Recommended Transaction.
It is important that all of the Resolutions are passed by the requisite majorities. This is because the Capital Raising and the Acquisition are interconditional and, together, they form the Recommended Transaction proposed and unanimously recommended by the HBOS Board.
If the Resolutions are not passed, none of the Acquisition, the Placing, the Open Offer or the HM Treasury Preference Share Subscription will proceed, and HBOS will be required to find alternative methods of increasing its capital base, and funding its business. On 11 October 2008 the FSA gave a preliminary indication to HBOS that if the Acquisition were not to occur, it would require HBOS to raise £12 billion of additional capital, made up of £9 billion of HBOS Shares and £3 billion of HBOS Preference Shares.
However, whilst HBOS would seek to raise additional new capital in those circumstances, there can be no certainty that the amount required would not be more than £12 billion or that HBOS would be able to successfully raise capital or as to the terms on which capital could be raised, including the terms of any participation by HM Treasury in any capital raising, or as to whether such fundraising would be on a pre-emptive basis. There can also be no assurance that HBOS would be successful in increasing its capital to the levels required to qualify for access to the Proposed Government Funding arrangements or to satisfy the requirements of the FSA on an ongoing basis.
This could result in an increase in funding costs arising from any credit rating downgrades or increased reliance on Government supported liquidity schemes; contraction of HBOS's balance sheet; and a longer time horizon than the one contemplated by the Recommended Transaction for the resumption of any dividend payments on HBOS Shares. Any capital raising might also be more dilutive and is unlikely to be available within the same time period as the Recommended Transaction.
There can be no certainty as to sources of capital if the Resolutions are not passed. The HBOS Directors would expect the UK Government to take appropriate action consistent with the policy objectives set out in HM Treasury's announcement of 8 October 2008 on Financial Support to the Banking Industry, which are to ensure stability of the financial system, and to protect ordinary savers, depositors, businesses and borrowers. Such action may include the issuance to HM Treasury of HBOS Shares on a basis which could be more dilutive to HBOS Shareholders than the Placing and Open Offer and the issuance to HM Treasury of other securities on terms less economically advantageous and more restrictive than the HMT Preference Shares or the loss of independent or private sector status for HBOS. The occurrence of any such action may cause the value of HBOS Shares to decline substantially with negative implications for HBOS Shareholders.