On Thai warrants and creating shareholder value.

Ah.. Thai Warrants -and creating new shareholder value.

One of the things I have noticed over the years is how Thai listed companies mostly issue warrants which are too often deep-in-the-money.  Why?

With this is meant that the exercise/conversion price into new shares of their warrants, is well below the current stock market price.  For example ATP30 (1.80) recently issued new warrants convertible at 0.85 Baht, even while the stock price was trading around 2 Baht.  This is just a recent examples and there are countless others from the past.  What are the shortcomings with this, as viewed from a finance and so shareholder value point of view?

First, while in the beginning newly trading deep in the money listed warrants often trade well (i.e. are liquid).  Then in time they invariable burn out, i.e. their trading liquidity vanishes and this serves nobody.  Second, almost always months later no time premium is left in them, it just vanishes over the months later.  The time premium is the "juice" where the warrants trade now beyond their intrinsic value.  "Juice", time premium, represents real new shareholder value.

Again taking the most recent example of ATP30, these warrants are trading around 1.10 so together with the 0.85 Baht conversion price, the total is priced at 1.95, this vs. the stock price which presently around 1.80.  This is only a 0.15 Baht time premium (juice) which is miniscule as the warrants have 2 full years to go. Realize for every 1 warrant you get to control 1 common share (convertible at 0.85), this so means you only employ barely half the capital invested to control the same number of shares.  The cost of this leverage is barely 0.15 Baht for in this case a 2 year period -as these warrants don't expire until the first half of 2019. 

There have been many examples over the years (some of which I point here out) where there actually is no time premium (juice) and sometimes worse, where the warrants trade at a discount to their intrinsic value.  If the warrants are close to their expiration date no time premium may be justified, as there simply is no time left.  But they should never trade at a discount, yet at times they do!   If this happens, its like shareholder value destruction.  Realize good time premium (juice), over hundreds of millions of newly issued warrants represents a huge amount of newly created shareholder value.  Warrants are always called "units" and never receive any dividends.  Most warrants will pro ratio adjust their conversion price (anti-dillution clause) if there is a capital increase later, but usually not if there is a stock dividend declared. However in a recently example on PPS, their existing warrants did adjust for the 1 in 5 stock dividend. Most warrants in Thailand are issued to shareholder for free "as a sweetener" -and can be sold anytime after they list. 

Shortly the CI new warrants 1 will trade, the stock is at 1.60 but the conversion price is way out of the money at 2.20 Baht.  Still as we will likely see soon these will command a small time premium even while intrinsically they are worthless -because they are 37% way from the conversion price (1.61 to 2.20). CI's new warrants will expire in 3 years.

In company meetings sometimes management tells me they want to price the warrants deep in the money because when they themselves convert they can do this for a lessor capital amount.  But this is not really all so, because the main (or any) shareholder can easily during the 2 to 3 year period sell out some of their owned warrants on the open market when these invariably at some point trade well and are awoken. Giving the option to reduce and raise capital for the coming warrant conversion. 

Or, mgt. can decide at the outset to just issue less warrants, but at a higher conversions price.  Say announce 1 to 8 ratio of free warrants for every share owned, opposed to say 1 to 4 or 5.   Anyway the majority shareholder has attractive finance options to reduce this concern considerably, if needed.  Even weeks before the warrants expire one can sell warrants on the open market to raise capital to help pay for the coming conversion.  Warrants which have a conversion price near or just below their share price will just about always command far more time premium...besides liquidly.   That is the warrants will be relatively more liquid over time in my long professional view if these are closer to the share's present market price.  Real experience and examples show this again and again.  More liquid trading warrants give all big and small investors more liquidity and so in turn increases p/e valuation in time as we have seen again and again on the SET.  These give investors more options to partake/inveset around the same company.  Deep in the money dormant warrants with no liquidity only help nourish their own self precipitating liquidity funeral.

The benefit warrant holders gain are millions and millions of Baht in higher shareholder value, solely created due to increased time premium. Only further enhanced through demonstratively higher average warrant trading volume.  Again, warrants should and will always trade far more liquid when they are near or slightly above the-money, not deep in the-money.  A warrant trades "at the money" when there is parity.

Again and its worth repeating, warrants issued near or just slightly below or above their current share price will just about always command far more time premium...besides trading liquidity. This is real shareholder new value created, vs deep in the money where the time value "juice" gets sucked right-out of them.  Also when the owners or mgt. of a listed company issues new warrants, close to the market price, they signal to the market they are very confident the stock price will be higher in time.  More liquid trading warrants give bigger investors more liquidity and so options in that security, this in turn increases p/e valuation in time as we have seen again and again. The SET as many stock markets is obsessed with liquidity in good part due to institutional investor requirement for this.

Not sure why Financial Advisors (FA) seem to keep recommending deep in the money warrants to Thai companies?  What am I missing?   Perhaps there is a tax reason or perhaps their fee is then so bigger?  But as I see it with the shareholder hat on,  companies here are behind the times with these nascent deep in the money warrants where both in time the liquidity and time premium just vanishes.

Best Regards,

Paul A. Renaud.
www.thaistocks.com