Shell Games at First Horizon, HBOS, Citigroup, Merrill

MarketWatch is reporting First Horizon to sell $600 million in stock, change dividend.

Tennessee bank First Horizon National Corp.(FHN) announced plans to sell up to $600 million in common stock and change its dividend payments to stock, showing even smaller financial firms are going to the capital-raising well and taking other moves to preserve capital.

The company gave no reason in a statement for the stock sale, which will give underwriting the option to sell an additional 15%. First Horizon on Friday filed with the Securities and Exchange Commission to sell an undisclosed amount of mixed securities from time to time; the stock fell 7.9% to $10.75. There was no premarket trading Monday.

In addition, First Horizon will stop distributing cash dividends after the dividend payable July 1. Instead, payments will be made with 20 cents a share in First Horizon stock, matching the cash rate.

First Horizon was among the banks eager to expand in recent years. In the mid-1990s, it began buying mortgage companies around the country. A few years ago, First Horizon decided its mortgage customers may also be interested in other services. In markets including Atlanta, Baltimore and Dallas, it started turning its mortgage offices into retail-banking branches, according to analysts and a company statements.

By last summer, as more homeowners around the country began having trouble repaying their mortgages, the bank retrenched. It set plans to sell the nearly three dozen new branches and focused again on its 200 or so locations in Tennessee. First Horizon is also scaling back its mortgage business, shuttering offices and laying off workers. Earlier this year, the bank announced it would discontinue its national home-building and commercial real-estate lending programs, and would focus on Tennessee and the Southeast.

Struggling To Survive

First Horizon is struggling to survive. It is also playing shell games that is going to cost it money. Stock dividends are tantamount to no dividends. The effect is the same as a stock split, and splits are clearly not dividends. It's even worse than meets the eyes.

Aroma Of Stock Dividends

Minyan Peter, ex-treasurer for a large US bank offered his opinions on non-cash dividends and hybrid preferreds this morning. Let's tune in.

A Few Morning Thoughts

First Horizon (FHN) and HBOS, as part of their capital raising announcements, have both indicated that they, for the foreseeable future, are switching from cash dividends to stock dividends. Unless these banks intend to repurchase an equivalent amount of stock from the open market and send it back out to shareholders as a dividend (which I highly, highly doubt), experience suggests these stock dividends represent nothing more than a fractional stock split. (Do the math.)

Further, these seemingly innocent dividends require a massive amount of work for the companies' accounting teams who must now go back and restate all prior year data to reflect the new share count. Net-stock dividends are nothing more than aroma.

Having been asked to comment on all of the "Hybrid" equity coming out of the banks and investments of late, I'll just offer that like corn based Ethanol, I believe that these securities will be of limited long run benefit. Substantially all banks need to stop paying cash dividends and issue more common stock.

These 8%+ preferreds, while currently celebrated, will be unsupportable by future earnings.

Hybrid Preferred Shell Game

I spoke about Hybrid Bonds in Need For Capital At Merrill Lynch, Citigroup, RBS.

Citigroup is another bank playing expensive games to keep its dividend intact. It makes no economic sense to borrow money at 8.4% to pay a dividend yielding 5%. The aroma of that deal stinks as well.

Things are so screwed up at Merrill Lynch, that it cannot even count as tier 1 capital the amount of money it is raising via hybrid preferreds because credit-rating companies typically don't allow more than 25 percent of a bank's capital base to be made up of preferred stock, and Merrill is well over that limit. I talked about Merrill Lynch's actions in Are Low Interest Rates Fueling Price Inflation?

HBOS Capital Raising Efforts

MarketWatch is writing HBOS may raise some $8 billion from shareholders.

HBOS, the U.K.'s biggest mortgage lender, may ask shareholders for as much as 4 billion pounds ($7.9 billion) at its annual meeting Tuesday to balance write-downs and strengthen its balance sheet as the economy slows, according to media reports.

If it goes ahead with the plans, HBOS would become the second major U.K. bank to require a so-called rights issue this month, on the heels of Royal Bank of Scotland (RBS) saying it would seek another 12 billion pounds last Tuesday.

HBOS is also likely to take further write-downs of about 3 billion pounds on its exposure to U.S. mortgages, the newspapers reported.

Analysts at Lehman Brothers said in a note to clients Monday that HBOS would need to raise some 3.2 billion pounds before any write-downs in order to increase its Tier 1 capital -- a key measure of financial strength -- to the 6% level that RBS is targeting.

The bank's capital ratio could also come under further pressure later in the year if U.K. house prices continue to fall. The latest data from Halifax's own closely watched index of house prices showed a 2.5% fall in prices during March, and the bank is forecasting low-single digit declines for the year.

Numis Securities analyst James Hamilton, however, contends a rights issue isn't the best course of action for HBOS, saying it would destroy shareholder value.

It's time for these shell games to end. Citigroup is going to have to eliminate its dividend because it cannot afford to pay it. Non-cash dividends at First Horizon are a farce, and Merrill Lynch acts as if it is raising capita when it can't even count it because it is already loaded to the gills with preferred issuance.

Ironically, some think the bottom is in. The bottom cannot be in when corporations are playing these kind of shell games and the deals are getting done. The bottom will be when these kind of deals can't get done.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List