Sunday, February 16, 2014

How to hack AIMS AMP Capital Industrial reit Rights Exercise

AIMS AMP capital industrial reit announced a rights exercise last Friday. It's a confusing 7 rights units  for every 40 shares of mother shares at a rights unit price of  $1.08. I can never understand how they derive these kind of strange numbers. Anyway, I'm interested to arbitrage on the rights issue and I'm sharing this on the point of view of someone who has no shares of aims at all and is looking to start a position. I've written a post about this in the past - it's here.

There's 2 ways to do this:

1. Get an initial position size before XR that maximizes the number of odd lots that you need to round up to a whole number. You'll end up with a lower average price for all your lots because the rights units are priced at $1.08 while the pre-rights price is at $1.415. This is based on the theory that for those who apply for excess rights (above what is entitled to you) will have priority over others. In my experience in doing rights, I've always been allocated enough excess rights to round off my holdings so that I don't get odd lots.

2. Arbitrage on the possible price difference between the nil paid rights that is traded on the market during the rights trading period and the theoretical ex-rights price (TERP). This is based on the assumption that during different times/day, the supply and demand might push the nil-paid rights price above/below the TERP, providing you with a good opportunity to arbitrage on the difference.

I'll explain the two points in detail below.

For the first point, I've done up a table that shows the number of lots of aims mother shares owned before XR (1st column), the number of lots of entitled rights based on 7 for 40 allocation (2nd column) and the number of odd lots that you need to round up to a whole lot (3rd column). I already arranged them in descending order for the 3rd column.

If you own 40 lots, then obviously you'll end up with round lots. I wanted an initial position smaller than 10k, so even though owning 23 lots will give you the maximum no. of odd lots that you need to round up, that's not for me. The next best option will be to own 6 lots of pre-XR mother shares, which will entitle me to have 1.05 lots of rights units, and I'll have to apply for 0.95 lots of excess rights to round up to a grand total of 8 lots.

Here's a summary:

This will give you a average unit price of $1.33125 (excluding brokerage fees) instead of the ex rights price of $1.365. Is it a lot of discount? Nope, it's about 2.47% discount off the TERP. I think it's more meaningful to consider Option 1 of buying at 8 lots at TERP after the whole rights exercise vs Option 2 buying 6 lots pre rights, get 1.05 lots entitled rights and applying for another 0.95 lots excess rights.

Option 1: Total cost including brokerage = $10,958.27
Option 2: Total cost including brokerage = $10,681.07

In absolute amount, it's about a difference of $277.20. Option 2 has a discount of 2.53% to Option 1. It's not a lot, and it's going to be less worthwhile if you own bigger lots in the first place. Whatever I'm calculated now is only for 8 lots in total of aims shares post rights. So, if you're planning on a bigger exposure (perhaps more than 10 lots), then don't waste your time - go get it after the rights issue when everything is settled.

For the 2nd point, you have to understand that the nil-paid rights will be traded for a short period of time, from 27th Feb 2014 (9am) to 7th Mar 2014 (5pm). This is meant for people who do not want to pay for the rights that are allocated to them and wish to cash it out instead. Since the TERP is $1.365 (btw, this is by no means fixed, hence theoretical) and the rights units are priced at $1.08, the nil-paid rights should start trading at a fair price of $0.285 (1.365 - 1.08 = $0.285).

Whatever nil-paid rights you have, either from buying from the market during the trading period or from the ones allocated to you, you'll  have to pay $1.08 per rights unit before 21st Mar 2014 (9am). If not, they will expire worthless. That's right, money that goes poof and disappears into thin air.

The all-important relationship is this:

Final price of shares post rights = 1.08 + price of nil-paid rights bought during the trading period

In summary:

If the price of the nil-paid rights goes lower than $0.285, after adding 1.08, you'll have a final share price post rights of less than $1.365. That's good.

If the price of the nil-paid rights goes higher than $0.285, and after adding 1.08, you'll have a final share price post rights of more than $1.365. That's not good.

In other words, buy when the price of the nil-paid rights goes way below $0.285. The lower the better.

I leave the post with the all important dates. I think the most important one is the last date of payment for excess rights. I've heard horror stories of people who forgot about that, and all their nil-paid rights vanished into thin air come 13th Mar 2014. Don't let that happen to you.


Anonymous said...

Very well written. Clear and precise and practical. For newbies and veteran alike, will find it very informative and useful.
In another words, better than any book i read about "Re-nounceable Rights issue.
Still the fundamentals of the company needs to be considered first per individual's thinking.

la papillion said...

Hi temperament,

Thanks for reading my long 'thesis' regarding the rights exercise :) Ya, I agree regarding the fundamentals. If it's rotten, raising rights will sell down the company below even the offer price for the rights units. I think we've seen that happen before :)

Cory said...

Echo what earlier said. Is not the first time i have rights. Through your "exercise" i get to learn more.

la papillion said...

Hi Cory,

Thanks! :) I write it so that I know what to do when I need to act :)

Derek said...

Hi LP,

Assuming I bought 6 lots and will definitely have (1.05 entitled + 0.95 excess), is there a way to calculate the price of the nil-paid rights that would be worth selling instead of applying for rights?

la papillion said...

Hi Derek,

Let's say you bought it at 1.385, 6 lots now. Your average price if you choose to pay the 1.08 for all the nil paid rights (both entitled and excess) will be 1.30875 without commission.

If you take 1.30875 and subtract off 1.08, you get 0.22875. That should be the fair value of your nil-paid rights. If it's more than that, you can sell it off and the end result would be better than if you paid 1.08 for the nil-paid rights.

But the only problem is that the average price of 1.30875 includes the excess rights, and you can't sell excess rights that you might/might not own yet during the trading period. So let's redo this:

Your 6 lots @ 1.385 plus your entitled 1.05 lots shares units @ 1.08 will give you an average unit price of $1.33957. You subtract off 1.08 you'll get 0.25957 for the fair value of your nil-paid rights. So any price more than 0.2596 will be a good price to sell the nil-paid rights allocated to you during the trading period, and that makes it better than paying $1.08 for the rights unit.

All these without including commms too, so if you can work out the details by including them in.

Derek said...

Hi LP,

Need some help here - my thinking is a bit screwed.

How many nil-paid rights will I have for owing 6 lots? Is it a fix 1.05 lots?

If so, shouldn't the price of the nil-paid rights be higher to make it worth selling if I manage to get more excess rights since I'm getting more at a discount?

Anonymous said...


I have 21 lots. What should I do now?

Thanks alot.


la papillion said...

Hi anonymous,

What do you want to do?

You can sell it all before the rights. You can wait and get your entitled rights. After you get your entitled rights, you can apply for excess rights to round up your odd lots. You can also sell off your nil-paid rights during the trading period. Or you can pay for all the nil-paid rights at the atm machine before the due date. You can buy more lots now too. You can sell some lots now.

The world is your oyster, so what do you want to do?

Anonymous said...

Very fair and honest answer.

"No one reacts to things as they are but to one's own mental images. Keep me aware that it is not what happens to me in life that matters but rather how i react to what happens".

Quote is actually a Christian's prayer by an unknown. i have shared it more than one time. i love it very much because i think it is a "Universal Truth" for everyone, Christians or non-beleivers or other Faiths.
And it is applicable to living and life all the time. But it is never easy to put into practice. Try it?

la papillion said...

Hi temperament,

Indeed very difficult to follow. When the wind blows, sometimes you can't help it but sways with it. It's hard to no react when things are changing all around you.

But I try and try to remain like that when I'm feeling negative emotions about something. It's good advice. The world can change, but your balance must remain centered.

Eugene said...

Hi LP,

Thank you for sharing your knowledge with us. Definitely help cleared some of the terminology up.
Just wish to get your advice on some matters.
1. I am currently holding onto 7 lots of AIMS CR. This will entitle me to purchase 1.225 lots of the parent share at $1.08. How would the payment be made?
2. When would i be able to apply for the odd lot of 0.775 lots in order to round it? Will it be via ATM or via mail with AIM?
3. When will the rights become nil-paid rights?
4. In the event i am not assigned any excess rights to round the odd lot, what are my options to buy from the open market to round it?
Thanks in advanced for your guidance.

la papillion said...

Hi Eugene,

All the questions can be found in the document that they are going to mail over to you. You'll be able to read up in detail (they do give examples to illustrate), so don't worry.

Let me try answering the questions now.

1. The payments of all nil paid rights will be made through ATM before 13th Mar 2014, 5pm. I think there are other means to do so too, but the most convenient one is through ATM.

2. The details will be in the document that will be sent to you shortly. I remembered in past rights exercise that I've to go the ATM to pay for the rights. So you calculate how much you are going to pay your entitled rights of 0.775 lots and any excess rights you want. So let's say you want to apply another 0.225 lots of excess, and together with the entitled lots, you just pay $1,080 through ATM. I can't be sure of the details but the instructions are given in the document that you're going to receive, so don't worry.

3. When the counter goes XR, the rights units that you haven't paid for but is entitled to have (that 1.225 lots) will become nil-paid rights. This will also include any rights unit that you bought off the market during the trading period. Again, you need to pay $1.08 per rights unit to 'convert' those rights unit to ordinary shares, otherwise they will expire worthless after 13th Mar 2014, 5pm.

4. It'll be too late to buy nil-paid rights from the market because the trading period of the rights will be over by 7th March 5pm, while the success of the excess rights application will only be known after 13th March 5pm. If you still have odd lots, you can buy/sell from the unit shares market. I'm not sure about other platform, but poems have a unit shares market that you can buy/sell your odd lots.

Eugene said...

Hi LP,

Thanks for the guidance!
Will await for the package to be sent to me.
Hopefully will be able to buy you a kopi someday.
Happy trading!

Roasty said...


At present I have 17 lots, with average price of 1.397 per share.

From your table, 0.025 lots is needed to round up. In my scenario, is it favourable to proceed as such (i.e apply for 0.025 lots excess)?

Assuming I am flexible to buy/sell as needed.


Anonymous said...

Hi, I see that you recommend entering after post rights. One point I don't get it is currently (xr), does it mean if I get the nil paid rights from the open market (once it starts trading), I still have to pay via ATM? This would mean double paying for the NPR? What would be my best option if I want to be vested? Currently I have zero holdings of any sorts.

la papillion said...

Hi Eugene,

Most welcomed! I realised I had done a blog post about how to apply for rights long time ago. Check out this post:

la papillion said...

Hi Roasty,

Yes, it's always good to apply for excess rights. The more you get, the lesser your average cost of your shares after the rights issue.

Just apply for it, if you don't get it, then there's no loss.

It's a bit too late to say it, but you can also sell some lots to make your odd lots 'odder', so that you can apply for more excess rights. Too late already though.

la papillion said...

Hi anonymous,

Actually I didn't recommend entering after post rights. I entered during CR, hoping to apply for excess rights.

Anyway, if you buy the nil paid rights now, you still have to pay $1.08 per nil paid rights that you own, either entitled or bought off the market. If you don't pay, they will expire worthless!

It's not double paying. The nil paid rights should be trading at (price of aims mothers share - 1.08). Let's say the current price of aims mother share XR is 1.37 now. The nil paid rights should be trading at 0.290 (1.37-1.08). If you buy the nil paid rights at 0.29 (you still need to pay brokerage), then later you pay 1.08 per rights at ATM, you might as well end up buying 1.37 of aims mothers share right away.

If you have zero holdings, the best way to enter now is to see if the NPR is trading at below valuation. If price of NPR + 1.08 < price of aims mother share, then go buy the NPR. THEN REMEMBER TO PAY 1.08 AT THE ATM!

If such an opportunity does not exist, then wait till the whole issue is over and buy aims mother share. Nobody knows what the price is like when that happens. It might go down, it might go up.

Anonymous said...

Just for sharing:-
"If price of NPR + 1.08 < price of mother share, then go buy the NPR."

The above situation had happened for LMIR during LMIR's last re-nounceable NPR.issue.

Always be very, very wary why market supply of NPR is more then demand. Why a lot of people are selling their NPR more then buyers. The market may be right. Most of the time, the market is "right".
But for LMIR, the Market was wrong.
i bet against the market but i almost shit in my pants.
No jokes!

la papillion said...

Hi temperament,

I think whether the rights is a good exercise or not really boils down to the fundamentals of the company. If the rights ultimately benefits the holders, then it will be well received.

I've heard some pple wanted to sell because they don't want to be held hostage by the company to buy more shares at this price. Nothing wrong with it of course. LMIR is another issue altogether lol

Anonymous said...

Hi la papillion,

As far as NPR is concerned, it can be manipulated by the market regardless of what you and i think of the fundamentals of the stock.
So i betted against the market on LMIR's NPR was exactly i thought the fundamentals of the company was O. K at that time.
So it can happen to AIM or any other company's NPR.
Everyone of us has to make our own deduction and judgement what the Market is doing or telling us. And act accordingly.
There is no right or wrong except one has to bear the consequences of one's decision.

la papillion said...

Hi temperament,

I don't get what you mean by betting against the market for LMIR. You mean the market for LMIR rights is down but you betted against it by buying?

Clarify pls?

I agree with taking responsibility for your actions part though :)

Anonymous said...

The market means that majority were selling their LMIR's NPR for one reason or other. But i thought it was a buy fundamentally. So i averaged all the way down, more than 6 or 7 times irrc. i remember the last round i did not get any lots. My bid was too low.
Don't believed now it happens but it did. That's why i said until i almost S@#* in my pants after it was over. If the market was right, i would have lost a tidy sum of money lol. i bought NPRs to the tune of converting them 70,000 units. It really very scary to go against the market at any time.

la papillion said...

Hi temperament,

Ah, I think the problem that you did not limit the size of your position. Averaging down is fine, but averaging down until the initial position swells to more than what you planned for is just too risky.

But i get what you mean by betting against the market. However, betting against the market is exactly what investor should do. You generally buy when everyone is selling so that you can get the best price. And it's always scary since you're running towards the direction that others are running away from.

Hard game to play hor, the market :)

Anonymous said...

Ya lol,
i was buying the NPR@ only 0.043 cents,IIRC - Very cheap what! Until i had to subscribed for the mother shares, then i realised i had committed more than i wanted too. That's why after everything was over then i realised i would have S@#$% in pants if i knew then.
No jokes.

Anonymous said...

Hi everyone,
It looks like most people will not end up with odd-lot due to temporary counter of "AIMSAMPI Reit R25" being setup. It also means the chance to get excess rights is also slim.

la papillion said...

Hi anonymous,

Thanks for alerting us to that!

Hmm, I opened up SGX site and saw two rights listing by AIMS. One is AIMS R (TZ7R) and the other is AIMS R25 (TZ8R). I think the first one has a board lot size of 1000 shares while the second one has a board lot size of 25. Great for rounding off any excess yourself lol

But I think think it's likely to get excess rights to round off odd lots :)

Unknown said...

I levelled up due to this post.

Missed the boat but still want to join in the action.. haha...

If we enter at a price below 1.365 post rights, it is not that bad a deal either?

For example, if it drops to 1.33, it'll be akin to have 6 lots CR and applying for 2 (1.05 +0.95)lots?


Alvin said...

Hi LP,

Would you happen to know about SCB online trading platform?

I am currently holding 2 lots of mother shares but I am not quite sure what my options are at the moment. Haven't received any documents from the company so far..

la papillion said...

Hi Jim,

Haha, good that you found the article useful :)

Ya, of course if the price of the mother share post right drops, it'll be good for new investor. I bought in at 1.385 CR and if I assume that I really got the 2 excess rights shares, my average per unit is only 1.309 - still lower than the current price now.

If it drops to 1.33 XR and you bought it, it certainly is not such a bad deal.

la papillion said...

Hi Alvin,

Unfortunately I don't because I don't have the SCB platform.

I read some comments on hwz that people who have the shares under scb also have not received anything yet. You might want to check the thread out:

Apparently you still have to wait for them to inform you thru sms. The nil paid rights are in your account already but you can't trade them yet.

Leo said...


Im holding onto 2 lots at a high average price of 1.6 per lot.

I'm allocated 350 rights.

Can i apply for excess rights of 1650?

If im fully allocated, i will have to pay $1080 x2?

Am i right to say after all these i would have averaged down to $1.34 per lot?

Sorry for my noob questions.

la papillion said...

Hi Leo,

You have 2 lots, so you will be entitled to 350 rights shares. You can apply for 1650 shares for rights, but I'll say you get a good chance to get only 650 shares because higher preference is given to round off odd lots. Anything above that is subjected to balloting.

If you're fully allocated 350 shares of the rights you're entitled PLUS the 1650 shares that you applied excess, then you have 1650+350 = 2000 or 2 lots. Since each rights share you have to pay $1.08, then yes, you have to pay 1.08 x 2000 before 13th March to exercise the rights shares.

If you really are allocated the 2 lots of rights shares, then yes, your average price will be 1.34. But as mentioned, most likely you'll only get 650, so your average will be $1.42677. This is more likely than 1.34, in my opinion, so you just work based on this number.