Various Malaysian companies have recently announced corporate actions such as bonus issues and dividends (both cash and share dividends). Investors may wonder how these corporate actions impact them if they are holding warrants over these companies on the ex-date of such corporate actions.

Read on to Find Out More.

How are structured warrants affected by bonus issues?

Adjustments shall be made to the terms of a warrant for certain corporate actions, including bonus issues, rights issues and stock splits. In these cases, the exercise prices and the exercise ratios of warrants affected may be increased or lowered accordingly on the ex-date, so that warrant holders are not disadvantaged by the corporate exercise.

Bonus Issue: Example

ABC Berhad announces a 1-for-1 bonus issue, which will go ex on Tuesday.  When Tuesday comes, the exercise price and exercise ratio of the call warrant over ABC, ABC-CA, will need to be adjusted lower.

The formula to calculate ABC warrants’ adjusted exercise price and exercise ratio pursuant to the bonus issue, are as follows: Adjusted exercise price =  X  / (1+N)

Adjusted exercise ratio =  E  / (1+N)

X = Existing exercise price of prior to the bonus issue N = Number of bonus shares received by a shareholder for each share held prior to the bonus issue E = Existing exercise ratio prior to the bonus issue

ABC-CA (before the ex-date) Exercise price: RM2.50 Exercise ratio (warrants per share): 10

ABC-CA (on and after the ex-date) Exercise price: RM2.50 / (1+1) = RM1.25 Exercise ratio (warrants per share): 10 / (1+1) = 5

How are structured warrants affected by dividends?

Firstly, warrant holders do not receive the dividends declared by the underlying company. However, this does not mean that they are disadvantaged. Regular dividends in relation to the underlying shares have been forecasted based on historical dividends and taken into account in the pricing of the warrant. This includes regular dividends in the form of cash or shares.

Typically, on the ex-dividend date, companies will see their share prices fall by the dividend amount declared. As warrants track movements in the underlying shares, some may assume that the fall in share price would mean that the price of the call warrants over that underlying would also fall, while the price of put warrants would increase. However, assuming all other factors remain constant and the regular dividend amount is the same as that which has been forecasted, there would be no change to the price of the call or put warrants if the price of the underlying shares falls by the dividend amount on the ex-dividend date.

While regular dividends do not affect the warrants, surprise dividends can.  Surprise dividends, or changes in regular dividends outside of the forecasted amounts, may lead to a drop in the price of a call warrant and an increase in the price of a put warrant. For instance, a special dividend is a surprise dividend, and may lead to adjustments to the exercise price and exercise ratio of warrants so that warrant holders are not disadvantaged by the corporate exercise.

Special Dividends: Example

To illustrate, assuming ABC Berhad announces a special cash dividend of RM0.300, which will go ex on Friday.  When Friday comes, the exercise price and exercise ratio of the call warrant over ABC, ABC-CA, will need to be adjusted lower.

The formula to calculate ABC warrants’ adjusted exercise price and exercise ratio pursuant to the special dividend, are as follows: Adjusted exercise price =  X  x  (P-D) / P

Adjusted exercise ratio =  E  x  (P-D) / P

P = Closing price of ABC shares on the last cum-dividend date (we assume RM3.00 in this example) D = Special dividend per one (1) ABC share held X = Exercise price prior to the special dividend E = Exercise ratio prior to the special dividend

ABC-CA (before the ex-date) Exercise price: RM2.50 Exercise ratio (warrants per share): 10

ABC-CA (on and after the ex-date) Exercise price: RM2.50 x ((RM3.00-RM0.30)/RM3.00) = RM2.25 Exercise ratio (warrants per share): 10 x ((RM3.00-RM0.30)/RM3.00) = 9

Important Notes

All adjusted exercise prices and exercise ratios will be rounded to the nearest 4 decimal points. Do note that adjustments may not be made if the adjustment results in less than 2% of the exercise price and/or exercise ratio being changed.

For further clarity, please refer to the structured warrants announcements on Bursa’s website. Whenever there is a corporate action announced by a company, the warrant issuer will make announcements on any adjustments to the terms of the warrants. There will typically be notices before the ex-date and another on the last cum date (a day before the ex-date).

Source: Macquarie Research - 21 Aug 2020