Darling v Mathewson and Burt

The chancellor has this morning delivered a swingeing kick to Sir George Mathewson, Sir Peter Burt and any HBOS shareholders who may think the battered mortgage bank has an exciting future as a state-supported independent bank.

The context is the proposed takeover of HBOS by Lloyds TSB, which has the blessing of the government, but which the veteran Scottish bankers, Burt and Mathewson, wish to blow up - as does the Scottish National Party.

Alistair Darling makes a number of pertinent points which will make many HBOS shareholders curse, but may persuade them that they have no alternative but to vote for the takeover.

First, he says that "there is no automatic right of access to the recapitalisation scheme" - which is not what Burt and Mathewson have believed to be the case.

Darling says that any institution applying for an injection of capital from taxpayers "must have a sustainable business model and delivery plan" and its "funding profile, sources and mix must be clear, broad-based and sustainable."

HBOS's own board determined that it flunked those tests, that the probable alternative to being taken over by Lloyds was full-scale nationalisation - hence its decision to agree to be taken over by Lloyds TSB.

The onus is therefore on Burt and Mathewson to prove that the HBOS board is wrong, that HBOS has a sustainable future as an independent organisation - in spite of its exposure to the tumbling British housing and commercial property markets, and in spite of its reliance on funding from the collapsed asset-backed securities market.

Mathewson and Burt may be right, and the HBOS board may be wrong.

But it's courageous of them to battle on in the teeth of the conspicuous doubts of HM Treasury.

Even if Mathewson and Burt were right, Darling has given HBOS shareholders a second reason for holding their noses and backing the takeover by Lloyds.

The chancellor has consistently made it clear that the terms of the capital injection for HBOS were agreed by him on the basis of the business plan presented by Lloyds and HBOS as a single, merged entity.

If that takeover were no longer to take place, he would wish to re-open the negotiation.

What does that mean?

Today's statement from the chancellor says that even if he were to agree to inject capital into an independent HBOS, that capital would be hugely more expensive.

All the new ordinary shares required by HBOS would be priced at an 8.5% discount to the prevailing market price. As of today, that would mean that the new capital would be priced at 61p, compared with 113.6p under the current recapitalisation plan (the plan that would collapse if the deal with Lloyds collapsed).

The implication is that taxpayers could end up with a stake of more than 70% in HBOS, on the conservative assumption that the FSA, the City watchdog, determined that HBOS only required £500m of additional capital (which HBOS's own board fears may be unrealistically low).

Many would see a 70% taxpayer shareholding as de facto nationalisation.

What's more, the Treasury has also said that the coupon or interest rate on the preference shares which HBOS is selling to taxpayers, along with the ordinary shares, would be re-set.

The new interest rate would be based on "the rate at which eligible institutions have announced the issue of such instruments recently" - which is a pointed reference to Barclays paying 14% on the "instruments" sold to the state funds and royals of Qatar and Abu Dhabi (see this morning's earlier note).

In other words, an independent HBOS - if it were allowed to remain in the private sector at all by the Treasury - would be paying a stonking 14% interest on the prefs, not the 12% negotiated as a bank being taken over by Lloyds.

So what do you get when you crunch the chancellor's technocratic statement into a single sentiment?

Hmmm.

It looks like a pretty blunt warning to HBOS's beleaguered shareholders that they would vote down the takeover by Lloyds at their severe potential peril.