Friday, August 12, 2016

The difference between preferential offer and rights

I just received the booklet from Croesus regarding their preferential offer of 10 new units @ 0.797 for every 259 shares owned on ex-offer date of 3rd Aug 2016 that I blogged about here. I initially thought this is like rights exercise, which I'm very familiar with. But on closer inspection, it is not. Let's explore what's the major difference.


I think the most important difference is that rights are usually renounceable. This means that if you do not want to take part in the rights and subscribe to it, you can do so by selling it. If you're a shareholder, you'll be entitled to rights shares. These are called nil paid rights, because you haven't gone down to the ATM to pay the subscription price for it to be converted to ordinary new shares. There's a nil paid rights trading period, about a week or so, where people can buy or sell their nil paid rights. If you do not want to take part in the rights, you can sell the nil paid rights in the market during the nil paid rights trading period, so you're sort of compensated for the eventual dilution in your shareholdings upfront.




So, renonuceable means you can sell/buy and transfer to others, and there'll be a nil paid rights trading period to facilitate this. The nil paid rights counter is usually accompanied by a letter R, so there's no question that this is the rights share you'll be buying or selling.


Preferential offer is non-renounceable. Well, at least the one offered by Croesus is not, so I'm not sure if I can extend it to all other such preferential offerings of other companies. Non-renounceable means you cannot sell/buy and transfer the new units to others. This also means that there will not be a nil paid rights trading period. You either subscribe to your entitlement by going down to the ATM to pay for it (in this case, $0.797 each) or you can walk off. But what you can't do is to sell your nil paid rights away, unlike a proper rights exercise. In other words, you either subscribe or you get diluted because of the injection of new units that you refuse to participate in.


To summarise, in all purpose, a preferential offering is like a rights exercise without the ability to buy/sell your nil paid rights because it's non-renounceable. 

If you really don't want to take part in the preferential offering, I see only a few options available:

1. Sell off the mother shares before the ex-offer date (I did sell off a part as I don't want to be over exposed here). But it's kind of late for Croesus now, since the XO date is over on 3rd Aug.

2. Ignore the entire thing, and let your rights expire without paying the $0.797. This is not a wise thing to do though.

3. Subscribe to the rights by paying $0.797 by 17th Aug 2016 and then sell it on the market when the new units gets listed on 26th Aug 2016. I am even going to apply for excess to see if I can get back cheaper for the holdings that I sold before XO.


I suppose those people who are really forced to put in more capital will be doing number 3. Might expect the Croesus price to drop after 26th August 2016.

11 comments :

Singapore Man of Leisure said...

Ah! The beauty of white spaces...

What?

I just spoilt it?

Sorli, sorli...

la papillion said...

Haha, fully expecting nobody will comment, since it's so technical! This is more for my own educational. Making notes as I read and research haha

Singapore Man of Leisure said...

LP,

Well, that escalated quickly!

LOL!

la papillion said...

U disturb me! I don't want to blog anymore!

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Sweet Retirement said...

Soilbuild Business REIT is also launching preferential offering soon.

Anonymous said...

thanks so much for sharing! very timely post as this is exactly what i have been trying to figure out for soilbuild.. it looks different from rights issue but i don't know what! - wooi

la papillion said...

Hi sweet retirement,

Yeah, vested in that too, haha :) These days, all the reits are going through the preferential offering method instead of rights. Not sure why though

la papillion said...

Hi anon,

No problem!

Anonymous said...

Hi Bro, I applied for the right as well. I received the refund from CRT, and I found that CRT deduct $1810.8 from my acc, which is equivalent to 2272 units. Usually they will round up/ down to avoid odd lot, isn't it? But how come the allotment amount so weird?

la papillion said...

Hi anon,

How many mother shares do you have before this rights exercise? Maybe they don't have enough excess rights shares to go around to even round off odd lots haha! How come so fast you got the rights - I checked and I haven't got it yet ..