Company Warrants – New Features Worth Noting

Foreword from ShareInvestor

This article “Company Warrants – New Features Worth Noting?” by R SIVANITHY was first published in The Business Times on 29 Mar 2017 and is reproduced in this blog in its entirety.

When company warrants first made their appearance in the Singapore stock market, almost all followed a standard template – they were invariably part of a rights issue, they could be detached and traded separately from the stocks or bonds that formed the rights and they had a five-year life span.

Warrants proved very popular because of the leverage they offered, so when the underlying shares rose by a certain percentage, the associated warrants rose by a multiple of that percentage. Of course, the reverse also held true and underlying stock falls were also magnified by the leverage but by and large, because of relatively lower cash outlay and long life spans, company warrants in their heyday did enjoy plenty of play.

However, over the years and possibly because structured warrants entered the market and offered punters a viable, short-term tradeable alternative, companies and their corporate finance advisers have gradually shifted away from that original template in order to remain relevant. So much so that there has been a quiet revolution in the company warrant segment that has resulted in the birth of many warrants that possess novel, non-standard features.

Before illustrating some of these new instruments, it’s important to bear in mind that a) it is in the interest of issuing companies to try to ensure their warrants are exercised so that a cash injection is received; and b) issues can be staggered or structured in such a way so as to space out these cash injections.

Consider first the warrants of property firm Second Chance that were the subject of a one-for-one bonus issue last June and were listed in January this year with an exercise price of S$0.25.

Instead of the previous five-year norm for a life span, this instrument expires in three years from the date of issue on Jan 25, 2017, and although it is “American style” in that it can be exercised any time before expiry, there is a six-month restriction, so first exercise can only occur on July 25, 2017.

The restriction is most probably because the company also has about 577 million earlier warrants with an exercise price of S$0.40 in issue that expire on July 24, 2017, so the first exercise of the newer tranche was timed to fall just after the earlier issue expires.

As an aside, perhaps the Singapore Exchange (SGX) should review its confusing nomenclature for these warrants – the underlying shares are listed alphabetically under “Second Chance” but the warrants are described numerically as 2ndChance and appear under “Others”.

A second interesting warrant is that of KrisEnergy. Unlike the previous five years or the current norm of three years, this instrument had a seven-year life span when issued in February this year, so expiry is in 2024 or 84 months after listing.

The reason for the long tenor is that the warrants were attached to a seven-year note issued by the company as part of a S$139.5 million preferential offering at the end of 2016. Note that the exercise price of the warrants is S$0.11 versus the shares which are around S$0.17, so the warrant is already in-the-money.

A third variation is to be found in Abundance International’s warrant, which is not American-style but instead is European-style, which means it can only be exercised upon expiry on Jan 30, 2021. For this reason, there is a small letter “e” which appears in front of the warrant’s name in SGX’s website.

Last but by no means least, a “plain vanilla” warrant listed on Tuesday. This was the AsiaPhos warrant, which has a three-year life span so expiry is in March 2020. Its exercise price is S$0.08 versus the shares at S$0.083 so at a current price of S$0.015 per warrant, buying the warrant and converting it means paying a 14.4 per cent premium over the share price.

Whether this is fair or not would depend on a variety of factors, the most important being the fundamental outlook for the underlying shares, a topic perhaps too long to delve into here.

For now, it’s sufficient to note the sheer variety to be found among company warrants, proof that the segment has evolved over time.