UK bank rights issues flop as Citi announces $7 billion writedown

Multi-billion-pound rights issues by two major UK banks produced disappointing results this weekend, as US giant Citigroup announced $7.2 billion in writedowns on its subprime, monoline and commercial real estate exposures.

HBOS announced its two-for-five rights issue in April this year, planning to raise £4 billion by issuing rights at 275p a share. But the general decline of the banking sector pushed HBOS below this mark for most of last week, though its shares strengthened again on Friday. Only 8.3% of the rights were taken up, the bank announced today, leaving underwriters Dresdner Kleinwort and Morgan Stanley with over £3.6 billion in unsold shares to place by close of business tomorrow.

The Barclays placing, announced on June 25, did little better, with shareholders taking up only 19% of the shares on offer. The rest of the £4 billion in new shares will go to various large institutions - Qatar Investment Authority, the Qatari Challenger investment fund, China Development Bank (CDB), Singapore's Temasek fund and the Japanese Sumitomo-Mitsui Banking Corporation (CDB and Temasek are already Barclays shareholders).

Meanwhile, Citigroup announced $2.5 billion losses for the second quarter of 2008, driven by writedowns of $3.4 billion on exposure to US subprime mortgages, $2.4 billion on monoline exposure, $545 million on exposure to commercial real estate and $428 million on leveraged finance exposure. The markets welcomed the news, which came in below analyst expectations of over $8 billion in writedowns.

The news reflects the growing belief that the global credit crisis is still far from over - interbank borrowing costs are still significantly higher than swap rates (the Libor-OIS spread) and major investment banks continue to report writedowns and losses from exposure to the subprime mortgages and monoline bond insurers at the heart of the turmoil.

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