8 companies have offered warrants since the beginning of the year
By JAMIE LEE
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(SINGAPORE) Corporate warrants are making a comeback as a way to entice investors to take up rights issues.
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Since the beginning of the year, eight mid-sized companies or small-caps have offered warrants that could raise a total of $874 million if these are fully exercised over a range of two to five years.
Of these eight firms, six companies are offering free detachable warrants as part of rights issues, which are now in vogue.
Around the same period last year, just two notable warrant issues - namely, from OSIM International and Metro Holdings - were made to raise about $12 million and $4.32 million respectively.
The first to offer free warrants this year was Saizen Real Estate Investment Trust, which in January launched a $44.75 million rights issue on the basis of 11 rights units for every 10 units held.
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The Japanese property firm also offered one free three-year warrant per rights unit.
The free warrants were dished out as a 'sweetener' for investors to take up the rights shares, said the company spokeswoman.
The largest so far includes a warrant issue from Indonesian palm oil producer Golden Agri-Resources, which is looking to raise some $381 million from warrants alone. These were part of its $311 million rights issue to offer 17 rights shares for every 100 existing shares at an issue price of 18 cents each.
The warrants, which have a three-year maturity period, were offered on the basis of two free warrants for five rights shares, and are a means to 'recognise the good long-term relationships' with shareholders, said Richard Fung, director of investor relations at Golden Agri-Resources.
Companies raising money through warrants are less likely to require immediate funding since the money could come in only a few years later, depending on the warrants' expiry date.
'Companies that want to take advantage of the current positive sentiment and liquidity in the stock market but anticipate capital expenditure requirements only in the future will consider issuing warrants,' said UOB's head of corporate finance Khong Choun Mun.
'Typically, warrants are useful in circumstances where the company will time the warrant expiry date to coincide with the due date of its long-term loan,' he added.
Issuing corporate warrants can also minimise the earnings per share (EPS) dilution, DBS managing director of equity capital markets Goh Chyan Pit told BT. 'This is unlike the direct issuance of new shares, which would be EPS- dilutive immediately.'
This is critical given the weak market conditions now, as companies may think that their stock prices are already undervalued, added Mr Goh.
But by taking this fundraising route, companies are not guaranteed the funds since shareholders can choose not to exercise their warrants, said co-head of corporate finance at Kim Eng Capital Ding Hock Chai.
'There's no certainty on the inflow of funds arising from warrants as the decision to exercise lies with the shareholders,' Mr Ding told BT.
Warrants are cheaper compared to the underlying share but the returns or losses depend on whether the underlying stock trades above or under the exercise price later, bankers say.
Two other companies - Asia Pacific Strategic Investments and KS Energy Services - have also proposed rights issue of warrants this year.
KS Energy plans to raise as much as $148.4 million assuming all warrants are exercised. This includes the $18.5 million to be raised from the rights issue of 92.7 million warrants on the basis of one warrant for four ordinary shares held at 20 cents apiece.
But UOB's Mr Khong said that the rights issue of warrants is still quite rare now as it does not satisfy companies' immediate funding needs, such as to reduce gearing or to make acquisitions.
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