HBOS has unveiled plans for a heavily-trailed £4 billion rights isssue as part of a refinancing under which Britain’s biggest mortgage lender will pay its interim dividend in shares and take an additional £2.8 billion writedown against the credit crunch.

The cash call — pitched as a two-for-five offer at 275p, a 45 per cent discount on last night's price — will raise HBOS’s core Tier 1 capital ratio to between 6 per cent and 7 per cent, from its current 5.7 per cent. The bank also says it will cut its pay-out ratio — the proportion of its profits it returns to shareholders in dividends — to 40 per cent.

Andy Hornby, chief executive, said: “We are planning for a more challenging environment and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further”.

The bank added that its trading performance in the year to date had been ”satisfactory”.

Neil Dwane, chief investment officer for Europe at RCM, an HBOS shareholder, said: "It all looks as expected from my perspective but with one crucial difference, namely that this rights issue raises their capital ratios to the best in the sector and shows that RBS has not raised enough capital."

RBS paved the way for a record-breaking rights issue with plans for a £12 billion cash call last week.

Mr Dwane said HBOS's writedowns were conservative and raising additional capital would mean the bank was well-placed to capitalise as a mortgage lender from weak building societies and the absence of Northern Rock.

But he added: "The only negative is that I think the chief financial officer or Treasurer should also have resigned to take responsibility for the stupid allocation to US asset-backed securities in the first place and the management of the associated risks.

"I will however be supporting this rights issue and believe that with a 7 per cent new dividend yield the stock looks attractive."

The additional writedowns comprise a £1.87 billion post-tax loss in HBOS’s banking book — more than three times bigger than the £509 million hit taken for 2007 — and a £970 million loss in its trading book, against £227 million last year. HBOS has been hurt by the falling value of its £7 billion portfolio of Alt-A mortgages, a category of American home loans between sub-prime and prime.

The rights issue is fully underwritten by Dresdner Kleinwort and Morgan Stanley. An extraordinary general meeting to approve the capital raising will be held in late June, with the new shares starting to trade in late July.

Unlike RBS, HBOS has a large proportion of small shareholders — some two million, a legacy of the demutualisation of the Halifax Building Society. Around 800,000 shareholders hold 200 shares or fewer.

HBOS said that the additional funds would enable it to consolidate its position in residential mortgages and savings, continue to grow in insurance and investment, and expand its overseas operations.

Paul Measday, banking analyst at Cazenove, provisionally cut his current-year earnings forecasts by 19 per cent due to the treasury writedowns, giving pre-rights 2008 earnings per share of 73.9p or 63p post-rights. On the basis of a 40 per cent payout ratio, Cazenove also provisionally cut its estimate of next year’s dividend to 28p.

“Given the weaker trading comments we expect to revise estimates downwards”, Mr Measday said in a note.

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