HBOS Sinks to Low, Putting Morgan Stanley, Dresdner in a Jam By Jon Menon and Ben Livesey June 12 (Bloomberg) -- HBOS Plc, the U.K.'s biggest mortgage lender, fell to a record low in London trading, meaning underwriters of its 4 billion-pound ($7.9 billion) rights offering may be forced to buy stock at a loss. Morgan Stanley and Dresdner Kleinwort Group Ltd. agreed in April to guarantee the sale of 1.5 billion shares at 275 pence apiece. Edinburgh-based HBOS dropped 12 percent yesterday to 258 pence, putting the gap between the market and offering price at 255 million pounds. Morgan Stanley, Dresdner and a group of unidentified sub-underwriters agreed to assume risks for any shares that aren't sold to investors when trading begins July 21. ``It doesn't look good for the underwriters,'' said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers, who helps manage $21 billion, including HBOS stock. HBOS is the third U.K. bank to decline after it offered existing investors the chance to buy new shares. Edinburgh-based Royal Bank of Scotland Group Plc is down 34 percent since it announced a share sale, completed this week, to raise 12 billion pounds. Bingley-based Bradford & Bingley Plc had to slash the price of its planned 300 million offering and bring in a private- equity investor to salvage the deal. ``HBOS confirms that its fully underwritten rights issue is proceeding according to plan,'' it said in a statement yesterday. The investment banks will get a fee for arranging the transaction that will be disclosed later this month. Dresdner spokeswoman Louise Beeson in London and Carlos Melville, a London-based spokesman for Morgan Stanley, declined to comment. Bradford & Bingley, Britain's biggest lender to landlords, cited a jump in late mortgage payments as the reason for selling a 23 percent stake to Fort Worth, Texas-based TPG Inc. and the decision to reduce its rights offering price to 55 pence from 82 pence. Mortgage arrears jumped to 2.2 percent of loans in April from 1.6 percent on Dec. 31, Bradford & Bingley said. HBOS's mortgage arrears are ``in line with the group's expectations,'' its statement said. The bank said in April it expects a ``modest'' increase in impairments. The outlook makes it harder for HBOS's underwriters to cite changing conditions to revise terms of the April agreement, said Irfan Younus, a London-based analyst at NCB Stockbrokers Ltd. ``The investment community would probably go berserk if they restructured the rights issue,'' said Peter Hahn, a London-based research fellow for Cass Business School and a former managing director at Citigroup Inc. The U.K.'s Financial Services Authority, the industry regulator, said it is monitoring HBOS. ``Hypothetically, if a bank's share price dips below its rights issue price, the FSA officially doesn't have to do anything,'' said FSA spokeswoman Teresa La Thangue. ``It's completely up to the underwriter. Unofficially, we monitor the situation very closely.'' Share declines at RBS, Bradford & Bingley and HBOS may indicate that rights offerings aren't a good way for banks to raise new capital, said Roger Lawson, spokesman for the U.K. Shareholders' Association. ``The massive discount offered on these rights issues is a problem,'' he said. ``It's a psychological negative signal suggesting all is not well with the business.'' The deteriorating U.K housing market and short-selling by hedge funds have weighed on HBOS shares, said Mamoun Tazi, a London-based analyst at MF Global Securities Ltd. HBOS's 12 percent decline in London trading yesterday was the biggest since March 19, when the Bank of England was forced to deny that HBOS had borrowed from the central bank. Officials at Bank of England declined to comment yesterday on HBOS. Morgan Stanley ranks fourth on rights offerings in Europe, the Middle East and Africa this year, according to data compiled by Bloomberg. Morgan Stanley has worked on rights deals valued at $6.1 billion in 2008, excluding HBOS. It was a bookrunner for Societe Generale SA's 5.5 billion euro ($8.6 billion) offer.