Anatomy of Thai warrants.

PaulRen's picture

Phuket-Bangkok,  January 19, 2024.    By

Anatomy of Thai warrants -to help finance a company’s higher growth rate.

Over the past 30 years I visited in person some 160+ companies often with the MD or CEO, at times touring their factories etc.. Here today, I want to address warrants as over the years these have been a meaningful-positive “shareholder sweeteners”  given to shareholders on record. This in addition to cash or stock-dividends.  Formulated well, these has been overall a great shareholder-value enhancer.

Warrants, just to state, are a shareholder benefit given to all shareholders on record on the day before the XW date,  including NVDR’s!   It so promises to, at a stated ratio, to issue new free warrants for shares held.  Convertible at a given share price & ratio, into the future. 

As just one example, say 5 to 1 (meaning for every 5 shares held one gets 1 new free warrant), convertible at a given conversion price for a set number of years, often say 2-3 years.  In this example, as is often the case (but can be different) for every 1 warrant, one can convert to 1 new share at the predetermined conversion price.  This is also referred to the strike or the conversion  price.

Let’s take this example further.  Say a company’s stock currently trades at 10 Baht and the new warrants issued, promise warrant holders to be able to convert at 8 Baht, usually on every Quarterly anniversary, up until expiration usually 2 or say 3 years later.   One can readily see how these have an intrinsic value of 2 Baht already, as it allows conversion at 8, vs. the current stock price being 10.  But in fact, the warrants on the mkt. will often trade at a higher price then 2 Baht (for reasons see below), and this is called the time-premium.  One so can see how this creates new shareholder value, at the outset!

Yet, one thing here I noted over lots of years is how many listed companies in the past, for reasons which remain a bit of a mystery to me, issue warrants which are “deep-in-the money”.  Meaning, in the above example, say convertible at 5 Baht, this is rather far away -or as we say at deep-in-the-money, from the 10 Baht, current mkt. price.  Such deep-in-the-money warrants almost never command much, if any,  “time premium” and almost always not trade very well,  i.e. are not very liquid.  Hence such warrants do not create much new shareholder value as they barely bring on much time-premium besides trade with low illiquidity! 

To explain this further take the same example above. Company A issues new warrants (the ratio of new warrants received to shares held, does not matter in this case), stated convertible at 5 Baht.  I can practically guarantee from vast-past-long experience here these warrants when listed will trade at barely above 5 Baht. This is always so as they are just too deep-in-the money, besides will not trade with much liquidity! 

Compare to example company B, same except this company issues the warrants convertible at 9 Baht, just below the current market price. Here these warrants will trade rather heavily and likely around 2-4 Baht, or say a 2-3 Baht in time premium!  This has been shown many, many times and this is for very good reasons which I may explain in further article.  If company B say has 500 mill. shares outstanding this time premium represents a very large shareholder new value enhancement/creation!   (Say 500 mill. shares, at a 1/5  ratio or 500 mill. : 5, times 2 Baht time-premium, = 200 mill. Baht newly created shareholder value (corrected from this original posted article, as the ratio is 1 new warrant for 5 shares).  Compare this to Company A, which generated no time premium. A big difference in newly created shareholder value.  This we have seen, time over, again and again.  

Now, why would a company choose this odd local practice here so often in issuing new warrants soo very deep-in the-money?  I deduced there may be 2 key reasons: none of which make much sense for the company -nor its shareholders. 

First, it may be that the large insider shareholders’ are concerned they may not have enough new capital to convert all the owned warrants, into new shares at such a high conversion price.  Fair enough.  But this reasoning does not hold-up to any great extent, as the insiders/owners surely can just dribble-out some warrants on the open market, over time say 2-3 years before the expiration date so to raise capital to pay for the new share conversion -as well at the same time reduce their total held warrants.  (double-benefit as they get the benefit of the enhanced time premium).  Again: so benefiting from the larger time premium.  Again not least, as mentioned warrants which are close to the money always (!) command far higher trading liquidity! 
Second, it just may be that the company's financial advisor recommended them to do so, well, as their earned fees are then higher!?  I must admit I found over many years few company MD’s understand warrants well i.e. how time premiums work and add shareholder value.  Understandably so.

Last but not least, last year we here witnessed what I would call a bad practice by just a very few small companies which just denied NVDR’s holders to get their shareholder free warrants.  This even while its SET states:  “NVDR holder automatically get these”.  These odd/very few companies in their SET official news release on announced warrants state something like, “it may violate foreign laws in NVDR’s home country” .  So just outright denied them, these entitled shareholder benefits. Bad.   I think this is a far stretch, questionable and not good... but in any event, should never affect NVDR holders which have on file with their broker a Thai address!  Surely NVDR holders (non-Thai investors) which hold a Thai address follow Thai law, not some country they long no longer live in,  in many cases so for many years.  Imagine a Thai citizen, residing outside Thailand, investing there and then told they can’t get say their US new right offerings,  as it “just may violate Thai law”?  Complete nonsense, as we have pointed out to the SET.   If this practice is a new norm here now -and SET turns a blind eye on it- I will advocate foreign NVDR holders no longer SET invest as expats -as this is a great shareholder injustice to be brought to light.

The issuing of free warrants is one desirable tool/option for companies which are growing -and so need to raise capital in order to finance this over time, as an alternative to expensive bank loans.  Yes, this does create some share dilution upon conversion into the new shares but at the same time enhances share trading liquidity to the underlying stock as well gives’ different investors the choice to participate in owning the shares, or alternatively get the warrants for potential future conversion i.e. to allocate far less capital -but with the guaranteed lower conversion price, if so chosen to convert. Also, a company's whose shares’ trade more actively (i.e higher liquidity) always commands a higher valuation on any stock exchange, especially so on the SET/MAI here. 

Last but not least, warrant holders are never under any obligation to convert into shares, but on expiration date warrants always expire worthless. Also warrant unit holders not get any dividends and have no voting rights.

Best Regards,

Paul A. Renaud.