It was good and bad news for HSBC this weekend. The bank's rights issue received backing from a resounding majority of shareholders, while at the same time, its custody division, HSBC Securities Services, got slapped with a law suit in Luxembourg in connection with the Madoff fraud.
HSBC announced yesterday that 96.6% of the shares offered in its £12.5 billion ($18.5 billion) rights issue had been lapped up by shareholders and other qualifying investors holding the rights. The balance of 3.4%, representing around 173 million shares worth £425 million, will be placed by the joint global coordinators, Goldman Sachs, J.P. Morgan Cazenove and HSBC Bank, by the end of today. The advisers are earning a fee of 2.75% of the rights issue proceeds and could also receive another 0.5% success fee, payable at the discretion of HSBC.
Existing shareholders were offered five shares for every 12 shares they own at a price of 254 pence ($3.81) per share, which for the Hong Kong shareholders translated into a price of HK$28 per share. The rights issue, which was fully sub-underwritten with support from Hong Kong's local tycoons, went through some hiccups as HSBC's shares traded down to HK$33 on March 9 and then continued to exhibit price volatility through the month of March.
"This [rights issue] underlines our determination that HSBC should maintain its signature financial strength which has served us so well over HSBC's long history," said Stephen Green, group chairman of HSBC in a written statement yesterday, commenting on the successful outcome. "We remain confident that HSBC is well-placed in today's environment and that our strength leads to opportunity."
The capital will come in handy should HSBC decide to acquire the Asian assets of the Royal Bank of Scotland which are currently on the block. Morgan Stanley is advising RBS on the deal. Australia's ANZ Banking Group and Standard Chartered are also rumoured to be in the running.
Meanwhile, on Friday, April 3, Vienna-headquartered Bank Medici, which is an asset manager as well as a distributor for the Herald Luxembourg fund, said that it was filing a suit in Luxembourg against HSBC Securities Services to recover the assets the HSBC division held as custodian for Herald. The amounts are reported to have been invested mostly in Madoff funds. "We are sure that Luxembourg is the best place to commence these proceedings, given the established probity of its judiciary and financial services industry," Bank Medici said in a written statement.
Bank Medici, which does business exclusively with institutional investors, said it "supports this activity of Herald Fund as it is an important step in the direction of the recovery of investors' assets".
Bernard Madoff was charged by the US Securities and Exchange Commission in December with securities fraud for running a multi-billion dollar Ponzi scheme, which consisted of paying returns to certain investors out of the principal received from other investors. Madoff's firm, which was founded in 1960, had $17 billion in assets under management at the beginning of 2008, but Madoff himself has estimated the losses from this fraud were at least $50 billion.
Madoff is now in jail after pleading guilty to various cases filed against him. He will be sentenced in June and faces life in prison. Bank Medici itself has had to relinquish its banking license and has been forced into liquidation by the Madoff fraud.
On December 15, HSBC clarified that its potential exposure to Madoff Investment Securities via financing provided to institutional clients who invested in Madoff funds was $1 billion. At the time, the bank said that it also had custody clients who had invested with Madoff but that it "does not believe that these custodial arrangements should be a source of exposure".
HSBC's success with its rights issue demonstrates that its shareholders are still behind the bank and believe in the strength of its franchise. But the law suit serves as a timely reminder that the collateral damage from the subprime-sparked meltdown of financial markets is still being felt -- and is difficult to quantify.