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* Manulife issues C$2.125 billion in common equity
* Says expects C$1.5 bln Q4 loss
* Reduces credit facility to C$2 bln from C$3 bln
* Shares fall 3.5 percent to C$19.74 (Adds quotes, updates share price)
TORONTO, Dec 2 (Reuters) - Manulife Financial Corp (MFC.TO) said on Tuesday it expects to report a quarterly loss of C$1.5 billion ($1.2 billion) due to falling markets, and plans to raise C$2.1 billion by issuing common stock, sending its share price down.
The new equity issue comes just weeks after the company said a C$3 billion bank loan would shore up its capital position, but it said it is now reducing the size of that loan facility.
Manulife said on Tuesday that it would sell C$1.125 billion of shares by way of private placement to eight existing institutional investors and C$1 billion to a syndicate of underwriters in a "bought deal" public offering, both led by Scotia Capital Inc.
The purchase price in both offerings is C$19.40 per share.
Manulife stock ended Monday's session on the Toronto Stock Exchange at C$20.46, and fell 3.5 percent to C$19.74 on Tuesday morning, after initially trading around the new-issue price.
The S&P/TSX financial index was down about 1.5 percent.
As equity markets have plunged, Manulife's capital position has become a source of concern for investors because lower share values force the company to set aside more money for guaranteed payments to customers years in the future.
"I think it was a prudent move at this point, now they're among the best-capitalized insurers," said Juliette John, a portfolio manager at Bissett Investment Management in Calgary. "This does lay to rest any concern about their capital support."
Citing tumbling stock markets in North America and Japan, Manulife estimated it would increase its reserves for variable annuities by around C$2.7 billion in the fourth quarter if equity markets remain unchanged.
The company said it sees a fourth-quarter loss of around C$1.5 billion because of this anticipated increase in reserves, along with the effect of lower stock markets on investment and other revenue.
Stock markets have dropped by 21 percent in Canada, 23 percent in the United States, and 24 percent in Japan in the two months ended Nov. 30, the company noted.
Manulife also said it would reduce the credit facility with the Canadian banks that it announced on Nov. 6 to C$2 billion from C$3 billion. Rating agency Moody's changed the company's outlook to negative because of the loan, although Standard & Poor's did not.
In an Oct. 14 conference call, Manulife Chief Executive Dominic D'Alessandro said Manulife was not looking at issuing common shares.
But in recent days some analysts, including Genuity Capital Markets analyst Mario Mendonca, had speculated that a new issue was possible.
In a note on Tuesday, Mendonca said it was a "smart move," but the company should have raised more money.
"While this offering certainly improves our outlook on the stock," Mendonca said, he still rates it "hold" due to its relative valuation, U.S. commercial mortgage exposures, and its "disproportionately high" sensitivity to equity markets.
D'Alessandro has repeatedly stressed that the company's capital position is strong, particularly compared with peers in the insurance industry that have been hammered by writedowns for toxic assets. Manulife has avoided such writedowns.
He reiterated that position in a statement on Tuesday, saying the company's capital position was "already strong" and the additional capital would let the company pursue acquisitions. Manulife said the consolidated capital ratio, a measure known as MCCSR, is estimated to be 235 percent, which it called "one of the highest in the company's history".
Manulife also said net income for 2008 is expected to be around C$900 million.
That would be a 79 percent drop from net income of C$4.3 billion in 2007.
"We are disappointed with this poor performance," D'Alessandro said, blaming the "unprecedented" slide in equity markets. ($1=$1.24 Canadian) (Reporting by Lynne Olver, John McCrank and Jennifer Kwan; editing by Peter Galloway)