The investment banks underwriting HBOS’s £4 billion rights issue took a £100 million paper loss yesterday after the closure of one of the City’s least popular capital-raisings.

Dresdner Kleinwort and Morgan Stanley were left with about £2.5 billion of stock when existing HBOS shareholders bought only 8.2 per cent of the 1.5 billion new shares offered by the bank at 275p.

HBOS’s shares slumped by more than 6 per cent yesterday to close at 264½p each, wiping £100 million off the value of the unwanted rights issue shares that the underwriters were forced to retain.

A spokeswoman for Dresdner Kleinwort said: “We will manage any stick [of shares] as we consider appropriate. We see value in the shares and are not under pressure to sell.”

The stick is the shares still on the underwriters’ books after a rights issue has completed and the underwriters have found buyers for as much leftover stock, called the rump, as possible.

Investors, thought to be mainly long-only fund managers, bought almost 21 per cent of the rights issue, worth £830 million, when the underwriters sold the rump yesterday. Sub-underwriters took 8.7 per cent, or £340 million, of the rump stock. The sub-underwriters will receive more shares when the underwriters pass on some of the 62.1 per cent stick, as agreed. The details of these agreements have not been made public.

Dresdner Kleinwort and Morgan Stanley are thought to hope that their support of the cash call, coming only weeks after UBS and Citigroup threatened to walk away from Bradford & Bingley’s (B&B) rights issue, will enhance their reputation as premier underwriters. Sources close to the banks said that the several near-collapses of B&B’s capital-raising, which has yet to close, had shaken faith in the rights issue process. “This has hung together through an unbelieveably difficult market,” a banker said.

Sources close to the two underwriting banks said that their stakes were “manageable”, but equity sales staff at rival banks expect them to hold their shares in HBOS for only a few weeks. “Investment banks are risk businesses – they can keep these things on their books for two to three weeks at most,” a source said. “They might get a bit of it away, but the rest is going to sit like a dark cloud over HBOS’s share price.”

HBOS’s capital-raising, which will boost the bank’s core equity Tier 1 ratio – a measure of financial strength – from 5.7 per cent to between 6 per cent and 7 per cent, proved even less popular than Barclays’s £4.5 billion cash call last week, in which only 19 per cent of investors participated. HBOS’s shares have traded below the 275p subscription price during most of the issue timetable and were 20p below in the few days before the offer closed.

HBOS will give a pro-forma capital ratio taking into account the rights issue proceeds when it reports its interim results on July 31. Andy Hornby, its chief executive, said that he was relieved that the capital-raising was finished. “It’s been a tough process,” he said. “You cannot imagine a more extraordinary banking environment in which to raise £4 billion.”

Mr Hornby, who expects house prices to fall by 9 per cent this year, remained gloomy about the economic environment. “This slowdown is here for the next 12 months,” he said.

— Paragon, the troubled buy-to-let lender, is in talks to be taken over by Blackstone, the private equity group, it was reported last night.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive