Renounceable vs Non-renounceable Rights Issue ( Edited )

< Edited : 17 May 2018>

Wow! another Non-renounceable Preferential Offering from Manulife US REIT ( here )

"The Issue Price of US$0.865 per New Unit represents a discount of approximately 7.9% to the volume-weighted average price of US$0.9391 per Unit for trades in the Units done on Singapore Exchange Securities Trading Limited (the “SGX-ST”) for the full Market Day on 15 May 2018."

I still prefer the previous rights of "UNDERWRITTEN AND RENOUNCEABLE RIGHTS ISSUE, a 21.6% discount " ...but it seems that the " Non-Renounceable Rights " will be the new trend now. ...

image credit to mrbachelorinvestment.blogspot.com

< First published : 14 May 2018 >

Recently, it seems that more and more companies are choosing to issue “Non-renounceable Rights” in an equity fundraising activities instead of “Renounceable Rights “.

My friend “ B “from “ A Path to Forever Financial Freedom (3Fs) had just written a good blog post in explaining how to take advantage and possibility of making some “profit or lowering your entry price “ by capitalizing the rights issue offer by a company from time to time. ( here ), and his detail analysis on FLT's asset acquisitions into Germany and Dutch industrial properties  ( here )

First and foremost, allow me to explain more about “ Renounceable vs Non-renounceable “ Rights.

What are 'Non-Renounceable Rights' ( From Investopedia.com)

Non-renounceable rights refer to an offer issued by a corporation to shareholders to purchase more shares of the corporation (usually at a discount). Unlike a renounceable right, a non-renounceable right is not transferable, and therefore cannot be bought or sold.

What is a 'Renounceable Right'

A renounceable right is an offer issued by a corporation to shareholders to purchase more shares of the corporation's stock (usually at a discount). Renounceable rights have a value and can be traded. 

During a rights offering, existing common stock shareholders are given the opportunity to purchase newly issued shares at a discount to the price shares will be offered to the public at a later date.

The “right,” which is given to the owner of each outstanding share is similar to a stock option: Each right’s holder has the option to purchase a specified number of new shares of the company’s stock at a specified purchase price on a certain date.

Renounceable rights issue:

: existing shareholders may

–       accept the offer i.e. exercise the rights and apply for excess if you want.

–       sell all or part of their rights to the new shares to another party.

–       do nothing i.e. reject the offer.

Non-renounceable rights issue

: existing shareholders may:

–       accept the offer and apply for excess, if you want.

–       do nothing i.e. reject the offer.

## for Renounceable rights, “ do nothing “ may not be the best option as the right is “tradable” and you may sell your right if you do not want to participate in this equity raising activities.

As I have blogged about it before, some investors may think that “Right issue for REIT = Weapon of Mass Destruction” 

“For some investors, right issues deemed as “taking back” whatever distribution given to shareholders in the past, it also affect another group of investors ( retiree ) who are depending on cash flow from the dividend for their daily / monthly expenses …

For some investors who are in the phase of accumulating wealth and with extra war chest in hand, right issues might be an opportunity for them as they could add more units with lower cost ( due to the irrationality of the market which caused the price to drop drastically ), and reap the benefit of lower average cost eventually when market turn around. Of course, it also depending on what types of an asset they are buying, and if it’s “yield-accretive “ or having the potential of growth factors.”

I personally prefer the right to be a “ renounceable”  one, as we have seen before that a company may offer more discount for such right where I could also take advantage to apply for excess right as well, from past experience, the market could be quite irrational towards such “deep discount” rights issue as well where price may drop much after the announcement.

But for now, it seems that the company prefer to have a “ hybrid “ like of equity raising via a combination of “perpetual bond “, “Private placement “ or “non-renounceable right”, with such combination, the right the ratio will be smaller as well as the discount given. Will this kind of equity raising methods be the future trend?

My latest experience was with “ Non-renounceable Preferential Offer “ from ESR –Reit, a 199:1000 right  @ offer right of $0.54 . (here)

“The Issue Price of S$0.54 per New Unit represents a discount of approximately 7.1% to the volume-weighted average price of S$0.5812 per unit in ESR-REIT ("Unit") for trades in the Units done on Singapore Exchange Securities Trading Limited (the "SGX-ST") for the full Market Day 2 on 27 February 2018.”

I have applied for all the right plus 9263 units of excess to round up my holding, guess what, I got all my excess rights allocated. The price has since dropped back to the issue price of around $0.54 (  adding the latest DPU of $0.00814 )after holding quite sometimes at $0.58 before the rights even all other REITs are dropping. For those who have also subscript to Manulife REIT rights issue ( an UNDERWRITTEN AND RENOUNCEABLE RIGHTS ISSUE, a 21.6% discount of rights offer @USD0.695 vs price after TERP )  on Oct -2017, you may find the different easily as I only got 410 units excess right allocated vs 5 K units I have applied for, the rest was a just a story and I disposed the share at USD0.915 subsequently.

Well, one of the reason might be partly due to weak market sentiment for REITs recently in current rising interest rate environment and also different types of REITs performance i.e Industrial REIT vs Office / Commercial REITs. But the questions here are more on discount price on rights offer on renounceable vs non-renounceable rights issue which will give us a "margin of safety " eventually.

As we have seen from the announcement from Fraser L&I Trust on their “non-renounceable preferential  offering of 1:10 @ $0.967/unit and after taking into consideration of Ex-D and TERP, an investor will still get around 8-9% of discount based on current price if we were to subscript to the right @ $0.967.

Of course, one may argue that ESR REIT vs FLT are two different animals ( having a different set of assets ) and it may not be a fair comparison.  Fair enough, but do you think 8-9% of discount is having sufficient M.O.S ( margin of safety) under current market condition for REITs…… 

Ummmm… I am still thinking …if I should apply for the excess rights.

Cheers !!

Quote Of The Day:

“It's easy for investors to get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that you are getting a bargain. Besides knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue.” From Investopedia.com

PS: This is just my own observation and speculation, it seems that there was some sort of price support after the announcement of a non-renounceable rights issue for particular stocks, vol and price increase as compared to previous average ...in order to hold on the discount price for rights since the % of discount is quite small. Will the stock price "puncture " after the rights issue exercise completed? I hope not for FLT!