Raising Capital By Issuing Rights

In July 2020 ADO Properties Germany performed a rights issue at a price of 14.60 denominated in Euros and listed the offering on the Frankfurt Stock Exchange (Prime Standard) as well as on Luxembourg's Stock Exchange. New shares were offered to the existing shareholders and the holders of subscription rights at a ratio of 5:12. The company's primary business is focusing on the purchase, management and development of income producing multifamily real estate. So basically a real estate investment trust and ultimately a capital intensive business.

So you might be asking the question, can you raise capital just by offering Rights?

Yes you can and it's been done countless times since Moses freed the Jews from slavery. What is a rights offering? According to Investopedia a rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants , in proportion to their existing holdings.?These are considered to be a type of option since they give a company's stockholders the right, but not the obligation, to purchase additional shares in the company.

In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.

What are the characteristics of a rights offering?

Once a rights offering has been declared, the company's common stock will trade with the rights attached. The stock in this situation is said to be trading cum rights. The company's stock, which is the subject of the rights offering, will trade cum rights between the deceleration date and the ex date. After the ex date, the stock will trade without the rights attached or will trade ex rights. The value of the common stock will be adjusted down by the value of the right on the ex-right date. During a rights offering, each share will be issued one right. The subscription price and the number of rights required to purchase one additional share will be detailed in the terms of the prospectus or terms of offering on the rights certificate. During the rights offering, the issuer will retain an investment bank to act as a standby underwriter and the investment bank will stand by ,ready to purchase any shares that are not purchased by the rights holders.

In regards to ADO properties the rights were fully underwritten and the Joint Global & Book-runners were J.P Morgan , Deutsche Bank, Barclays and Kempen & Co and the offering was for raising 450 million euros.

How to determine the value of a right cum rights?

In order to value one right before the ex-rights date, you must use the cum-rights formula. Subtract the subscription price of the right from the market price of the stock. Once the discount (if any) has been released, divide the discount by the number of rights required to purchase one share plus one. This will give you the value of one right.

Hypothetical Example:

Let's say ADO properties has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common stock through a rights offering. ADO properties is trading on the stock exchange at ￥51/ share and the rights have a subscription price of ￥48/share. Attention! the stock price reflects the value of the right that is still attached to the stock.

The value of a right goes a little something like this:

Stock price-Subscription

The number of rights required to purchase one share +1

￥51-￥48

￥3/3 rights= ￥1

Because each one of the 10,000,000 shares is entitled to receive one right and ADO properties is offering 5,000,000 additional shares, it will require ￥48, plus two rights, to subscribe to one additional share. Who ever is in charge of the secretarial work will be handling the name changes when the rights are purchased and sold in the market place. You can also execute a rights offering even if you are a private company however you have to de materialize your shares, and make them avialable for clearing on Crest or Euro clear and have a registrar handling your secretarial work.

How to determine the value of a right ex rights?

You subtract the subscription price of the right from the market price. Once the discount is revealed (if any), divide the discount by the number of rights required to be purchased. This will give you the value of one right. The price of the stock on the ex-rights ate is adjusted down by the value of the right to reflect the fact that purchasers of the stock will no longer receive the rights.

Hypothetical Example:

ADO properties has 10,000,000 shares of common stock outstanding and is issuing 5,000,000 additional common shares through a rights offering. ADO properties is trading at ￥50/share and the rights have a subscription price of ￥48/share. The value is calculated as follows:

Stock Price - Subscription Price

￥50-￥48 = ￥2

￥2/2 rights = ￥1

Because each one of the 10,000,000 shares is entitled to receive one right and the company is offering 5,000,000 additional shares, it will require ￥48, plus two rights, to subscribe to one additional share.

Do you want to know more about raising capital? Do you want to know how you can take your company public via other methods such as reverse merges? Do you want to know about structuring deals via onshore/offshore vehicles? And do you want to know about instruments? Subscribe to this newsletter...

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