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.