Warrants by skmr
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Transcript of Warrants by skmr
WARRANTS
&CONVERTIBLES
WARRANTSWarrants are call options that give the holder the right, but
not the obligation, to buy shares of common stock directly
from a company at a fixed price for a given period of time.
Warrants tend to have longer maturity periods than
exchange traded options.
Warrants are generally issued with privately placed bonds
as an “equity kicker”.
Warrants are also combined with new issues of common
stock and preferred stock, given to investment bankers as
compensation for underwriting services.
TYPES OF WARRANTS
When warrants are issued along with host securities and
detachable are called Detachable Warrants
In some cases warrants can be sold back to company
before the expiry date they are known as Puttable
Warrants
NAKED WARRANTS are issued separately not with host
securities
ADVANTAGES OF WARRANTS
Warrants makes the non convertible debentures and
other debentures more attractive and acceptable.
Debentures along with the warrants are able to create
their own market and reduce the company's
dependence on financial institution's.
Since the exercise of the warrants take place at future
date , the cash flow & the capital structure of company
can be planed accordingly.
The cost of debt is reduced if warrants are attached to
it. Investors are willing to accept lower interest rates
in the anticipation of enjoying the capital appreciation
of equity value at later date
Warrants provide high degree of leverage to the
investors. It can sell the warrants in the market or
convert it into stocks or allow it to lapse
Warrants are liquid they are traded in stock
exchanges
CONVERTIBLE BONDSA convertible bond is similar to a bond with warrants.
The most important difference is that a bond with
warrants can be separated into different securities and a
convertible bond cannot.
The minimum (floor) value of convertible:
Straight or “intrinsic” bond value
Conversion value
The conversion option has value.
THE VALUE OF CONVERTIBLE BONDS
The value of a convertible bond has three
components:
1. Straight bond value
2. Conversion value
3. Option value
THE VALUE OF CONVERTIBLE BONDS
Stock Price
Straight bond value
Conversion Value
= conversion ratio
floor value
floor value
Convertible bond values
Option value
CONVERSION POLICYMost convertible bonds are also callable.
When the bond is called, bondholders have about 30 days
to choose between:
1. Converting the bond to common stock at the
conversion ratios.
2. Surrendering the bond and receiving the call price in
cash.
VALUVATION OF WARRANTS Theoretical value – theoretical value can be found out if
we know the ordinary share s market price and warrants
excise price
Warrants Theoretical value =
( share price - exercise price )* exercise ratio
Y W & C are Issued ??Convertible bonds reduce agency costs, by aligning the
incentives of stockholders and bondholders.
Convertible bonds also allow young firms to delay expensive
interest costs until they can afford them.
Support for these assertions is found in the fact that firms
that issue convertible bonds are different from other firms:
The bond ratings of firms using convertibles are lower.
Convertibles tend to be used by smaller firms with high growth
rates and more financial leverage.
Convertibles are usually subordinated and unsecured.
REASONS FOR ISSUING WARRANTS AND CONVERTIBLES
A reasonable place to start is to compare a hybrid like
convertible debt to both straight debt and straight
equity.
Convertible debt carries a lower coupon rate than does
otherwise-identical straight debt.
Since convertible debt is originally issued with an out-
of-the-money call option, one can argue that convertible
debt allows the firm to sell equity at a higher price than
is available at the time of issuance.
Cont..
From the shareholder’s perspective, the optimal call
policy is to call the bond when its value is equal to the
call price.
In the real world, most firms wait to call until the
bond value is substantially above the call price.
Perhaps the firm is afraid of the risk of a sharp drop in
stock prices during the 30-day window. \
SUMMARY & CONCLUSIONSConvertible bonds and warrants are like call options.
However, there are important differences:
Warrants are issued by the firm.
Warrants and convertible bonds have different effects on corporate
cash flow and capital structure.
Warrants and convertibles cause dilution to existing shareholder’s
claims.
Many arguments, both plausible and implausible, are given for issuing
convertible securities.
Convertible bonds lends the chance to benefit from risks and reduces
the conflicts between bondholders and stockholders concerning risk.
By Shashi kumar M RMBA1NZ12MBA51NEW HORIZON COLLEGE OF MANAGEMENT STUDIES