Chapter 6: Corporate Actions Flashcards
What is the Eurozone equivalent of LIBOR?
EURIBOR
What do dividend paying companies try and do?
Issue dividends at a consistent, growing rate
How do FRNs income events differ to fixed income?
Will often pay more frequently, quarterly
What are preference shares sometimes described as?
Hybrid instrument
Rate of dividend is specified in advance, similar to a bond
Issuer can still stop paying dividends in times of stress
What is a bullet payment?
Lump sum repayment of the entire principal at maturity
What are bonds that are structured to be repaid once known as?
Bullet issues
What are non-bullet issues?
Issues that repay the principal over a series of payments
What is considered riskier between bullet and non-bullet issues?
Bullet, as it’s a large payment on a single date
What type of issue is the sinking fund?
Bullet
What is a sinking fund?
Involves the issuer setting aside a certain amount of funds towards the maturity payment each year
To who is the funds paid to in a sinking fund?
Separate trustee
What can the trustee do with the funds from a sinking fund? (2)
Hold the money until the scheduled maturity date, or buy back bonds if they are trading below par.
What is a callable bond?
One where the issuer has a right to redeem the bonds at a pre-agreed amount, usually at par value.
What is a putable bond?
One where the investors have the ability to require the bonds to be repaid early
What are the 3 equity capital events?
Bonus issue
Stock split
Reverse stock split
What is a bonus issue?
Share are issued to shareholders for no consideration. Pro bono.
What other terms is a bonus issue described as? (2)
Scrip issue
Capitalisation issue
Why would a company perform a bonus issue? (2)
Public relations
Reducing the current market price
How does a bonus issue impact the way shareholders’ funds are shown in company accounts?
Converts undistributable capital reserves into share captial.
Essentially similar to a dividend but they are getting shares worth some value, note this is already intrinsic value and overall value will not change
How are undistributable capital reserves generated? (2)
Past shares issues at a premium to nominal value
Accumulation of past profits
How could a bonus issue increase market cap?
Making the shares more marketable and accessible, increasing demand, thus increasing share price
How do bonus issues and stock splits differ?
For market structure they don’t.
Bonus issues will change company accounts by moving capital from reserves to share capital
Essentially a debit from the retained profit and a credit to share capital - overall value does not change
What are pre-emptive rights?
Give existing shareholders the right to subscribe to new shares before offered to public
What is the purpose of pre-emptive rights?
Ensure that the level of control a shareholder has is not diluted by any issue without prior agreement
What do jurisdictions require before allowing new shares to be issued to anyone but the existing shareholders?
Special resolution from shareholders
Is it common to see pre-emptive rights waived in listed companies?
Yes, but best practice is to limit dilution to 5%
What is a rights issue?
Company can raise additional capital, complying with pre-emptive rights, by offering new shares for cash to shareholders in proportion to their existing holding.
How are rights issued usually priced?
At discount to market value
What can a shareholder do with their rights if they choose not to partake in the rights issue?
They can often be traded on the exchange where the company is listed
Receive cash as payment for the dilution of interest
Why would a rights issue be offered at a deep discount to market value? (2)
To ensure full subscription, and to reduce/avoid the cost of underwriting the shares
What is the cum-rights period?
The period where those who hold the companies shares have rights to purchase more in line with the rights issue
How long does a cum-rights period tend to last?
Minimum of 10 business days, through to the acceptance date
What is the acceptance date in a rights issue?
Acceptance date is the date where the shareholders have decided to take on the new shares or now
What is the provisional allotment letter?
Letter where shareholders are advised of their entitlement
It is renounceable and transferable
Sets out the acceptance date and new shares
What does pari passu refer to?
In a rights issue, new shares rank equally to existing shares
How would a “pari passu” rights issue of affect share price?
Share price should fall to reflect the dilution affect of the new shares
What is the theoretical calculation for the price which shares will fall to post rights issue?
[(shares held cum rights * share price) + (no. rights allocated * rights issue price)] / total no. shares held assuming rights exercised
What is the difference between the ex-rights price and rights issue price known as?
nil-paid value
What are the four options that a shareholder have following receipt of the provisional allotment letter?
1) Take up rights in full - send cheque to company
2) Sell the rights nil-paid in full
3) Sell part of rights nil-paid
4) Take no action - rights automatically sold
How does selling part of rights to preserve current stake work?
If an investor wishes to retain shareholding in the company, but does not wish to invest further capital they can sell part of their rights to finance the rights they want to take up.
What is the share premium account sometimes known as?
Additional paid-in capital
What is the share premium account?
The capital that a company raises in excess of the nominal value of the shares
What is the nil-paid value?
The theoretical value of the right to buy a share in a rights issue.
How is the nil-paid value calculated?
Comparing the theoretical ex-rights price to the price of exercising the right
What does “Swallowing the Tail” refer to?
Selling part of your rights to fund purchase of them
What is the calculation for the number of nil-paid rights to be sold to take up the balance at nil-cost?
(issue price of new shares * number of shares allocated)/(theoretical ex-rights price)
When might a company issue a share buyback? (2)
When a company has surplus cash (e.g. sold business)
When a company wants to re-organise its capital structure to include more debt and less equity
Why might there be restrictions on share buybacks?
Prevent shareholders from being unfairly preferred to creditors
What is an accelerated book build?
Share buyback form where an investment bank will contact a number of institutions that hold shares and enquire on their willingness to sell a particular price points
What is a strategic stake?
A shareholding in a company in order to prevent a company being taken over by a competitor.
Why might a company do a strategic stake?
Protect company’s supply chain
E.g. supplier provides raw materials, company takes a shareholding to protect its own interests
What is a dawn raid?
Where a predator will purchase a large amount of shares as soon as the market opens/short period of time.
How can a company build a stake in an “indirect “ way?
Using CFDs, contracts for difference.
How do CFDs work?
Agreement between the buyer and the seller to exchanging the difference in the current value of the shares to the value at the end of the contract.
When is an investor judged to have a notifiable interest in a company?
3% stakeholding
At what price must a mandatory cash offer be made under POTAM rules?
At least the highest price paid by the offeror over the previous 12 months.
What does POTAM stand for?
Panel on Takeovers and Mergers
What is the difference between a callable and a puttable bond?
Callable, issuer can redeem early
Putable, bondholder can redeem early
What do jurisdictions require before waiving pre-emptive rights?
Special resolution (at AGMs)
Why may a stake be built?
Prevent takeover and influence the company
How can a stake be built indirectly?
With CFDs
When is a mandatory offer required per PTM rules?
hold more than 30% of voting rights
increase holdings from 30% or more but less than 50%
What must an investor do when holdings are above 3%?
Alert company, and alert for any fall or rise through a whole percentage point
What is the limit on the cash offer from the offerer?
Cannot be less than the highest price paid in the previous 12 months
