Since the start of the year, several listed companies in the stock market have conducted stock rights offerings to the public and many more are scheduled to follow in the coming months.
Robinsons Land Corp. (RLC) was the first listed company to launch a Php20-billion stock rights offering early this year. This was followed by Integrated Micro-Electronics Inc. (IMI)’s Php5-billion rights offer in February and the Philippine Stock Exchange, Inc. (PSE)’s Php3.2-billion rights offer in March.
Just recently, Metropolitan Bank and Trust Company (MBT) and Bank of the Philippine Islands (BPI) also completed their own stock rights offerings, which raised Php60 billion and Php50 billion respectively.
There are more listed companies, particularly banks, who will be doing stock rights offerings this year as companies gear up to raise funds for expansion.
A stock rights offering happens when a listed company plans to raise funds by issuing rights to its shareholders to purchase additional stocks at a discounted price in proportion to their existing holdings.
For example, you may be entitled to buy one new share of a listed company at a discount of 20 percent to market price for every five shares that you hold.
The terms of the rights such as the entitlement ratio and discount offered differ for every company. Some may be more generous while others may be less attractive.
How do you know if you should subscribe to a rights offer? What are the terms that you should look for? What will happen to your investment in the company if you choose to ignore the rights offer?
Here are five things every stock market investor needs to know about rights offerings and how to profit from it:
1. Know when you are entitled to buy
Remember that the stock rights offering extends only to shareholders of the company. In order for you to participate, you need to buy the stock to earn the right to buy additional shares at a discounted price.
There are two important dates that you need to note: the record date and the ex-right date. The record date refers to the date by which investors must be on the company’s shareholder list, who have the right to buy additional shares at a discounted price.
But in order to make it to the record date, you must buy the stock a few days before it. The cut-off date is called the ex-date. Buying the stock after the ex-date will not qualify you anymore to be included in the list by the record date.
For example, when RLC announced its stock rights offer, it set the ex-rights date on January 26 with the record date on January 31. All investors who hold RLC shares before the ex-date shall be eligible to the rights and included in the January 31 record date.
2. Know the terms of the rights offer
There are two items that you need to know about the rights offer: the entitlement ratio and the discount. As a shareholder, you will have the right to buy additional shares in proportion to your holdings at a discounted price.
For example, in the recent rights offering by MBT, the company offered its eligible shareholders the right to buy one new share of MBT for every 3.976 shares owned at 22-percent discount to market price.
If you had 5,000 shares of MBT as of the record date, you would have earned the right to purchase additional 1,257 shares (5,000 shares divided 3.976) at discounted price.
3. Know when to exercise your rights
If you are entitled to buy additional shares but you are not interested in the terms of the offer, you have the right to ignore and do nothing. There is no obligation to purchase if you decide not to participate.
However, you need to note that not taking advantage of the discount offered by buying more shares may result to lost opportunities, especially if the stock market is trending higher.
Let’s say you bought shares of BPI at Php113.78 per share before the ex-date. The terms of BPI entitle you to buy one new share at Php89.50 for every 7.0594 shares you hold.
If you subscribe to the shares, your average cost per share will be Php110.77. This is computed by first getting the sum of your investment cost (7.0594 shares multiplied by Php113.78) and one share at Php89.50 and dividing it with 8.0594 shares.
If you chose to ignore the rights offer and the stock went higher, let’s say to Php115, you would have lost the opportunity to make more by the difference between Php115 and Php89.50.
But this is on assumption that the market is trending upwards. If the market is falling, there is always a chance the share price will go down which will not make the rights useful.
4. Know that rights are not transferable
Unlike in stock markets overseas, if you don’t like the rights offer, you cannot transfer it in the open market like selling it to other investors who may be interested to buy the rights.
There is no option to monetize the rights into cash if you do not intend to use it because rights are not tradable in the Philippine Stock Exchange. The rights will simply expire if you do not exercise it in time.
The shares that are allocated to you in proportion to your holdings shall be offered to other investors who have used their rights as additional subscription. Majority shareholders and small investors will have an equal chance of buying the excess shares at a discounted price after the offering.
If you are on the other side of the fence and you want to buy more shares beyond your allocation, this may offer you a good chance to buy stocks at a bargain price.
5. Know the potential value of a stock before you subscribe
Do not subscribe to rights offers for the sake of buying the stock at a discount. No matter how large the discount is, if the stock has poor fundamentals, the share price will always fall and even lower than the discounted price.
Normally, the reason why a company conducts a rights offer is to raise funds for expansion. When a company spends capital expenditure, it means that it is investing in the future, which adds value to the stock.
But there are companies that raise funds from shareholders in order to pay existing debts, or finance losing a venture. Paying existing loans by raising money from shareholders does not create significant value for the business. The sales generated by the business would still be the same, with only savings from the interest expense as the only benefit.
Similar to buying any Initial Public Offering, it is important that you always review the company’s investment prospectus. This is where the company normally talks about its plans for the future and how it will use the proceeds from the rights offering.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice email@example.com or follow him on Twitter @henryong888