Investing 101: Rights Issue/Preferential Offering

When a new investor starts out, everything sounds relatively simple. Spend money through a brokerage to buy shares of a company. Sell those shares to get back money, or hold for some time to get some money back through dividends (for applicable companies)! 

Basically, someone who's starting out only has two actions to be concerned about:

1. Spend money to buy shares

2. Get money by selling shares

Once in a while, you might hear some news like "fund raising through equity", "rights issue", "preferential offering" or "private placement". What on earth are these? This post will step through a few things that investors should definitely know about these stuff!

By the end of the post, you'll understand the rationale behind such actions, and learn how to parse such announcements and act on them.

I'll use the abbreviated format for Rights Issue (RI), Preferential Offering (PO) and Private Placement (PP) for the rest of the post.

The Basics

Every now and then, companies find themselves in the need for more funds. This could be due to an attractive acquisition coming up, or if their financials are worsening and they need funds to stay afloat.

There's typically two ways to do so. The first one would be the most intuitive and familiar for everyone, which is to take on more debt. After all, this is a method that individuals can take as well, through things like bank loans. However, taking on more debt may not be feasible or attractive in certain circumstances. You'll need to find someone willing to lend you the money, and even after that, you'll be saddled with more interest payments.

Therefore, some companies opt to raise funds through equity instead. This involves offering shareholders the chance to buy more shares (often at a discount), which will translate to an injection of funds to the company. A simple illustration here:

1. Company aims to raise $100 million

2. Company currently has 500 millions shares outstanding (in circulation)

3. Company offers 1 new share for every 5 existing shares, at $1.00 per share

4. Company raised (500 million / 5) x $1.00 = $100 million

5. Company now has 600 million shares in circulation

Key Differences

Retail Investors/shareholders (like me) can easily access RIs and POs by applying for them through an ATM/custodian service, whereas PP would require me to go through a broker, who might have some PP shares catered to their clients.

The advantage of PP is that it is done really quickly, typically within 2-3 days of announcement. This is because the company can directly approach individual shareholders (typically those who have the ability to buy a huge chunk at one go), making the process much more straightforward.

RIs are typically tradable, meaning if you as an existing investor would rather not fork out any more money to buy the shares at a discounted price, you can sell the "right to buy the new shares" on the market to someone else who might be interested in subscribing. On the other hand, for POs, if you are not interested, the only thing you can do is to let the offer lapse.

Rights Issue

I'll be breaking down First REIT's RI announcement on 27/1/21 to show new investors how to digest and find the key details. Check out the full document here.

From the highlighted portion, you'll know that if you hold 10,000 units right now, you will be entitled to buy 9,800 more units through the RI, at a price of $0.20 per unit. This means that if you wanted to, you can definitely get 9,800 more units by forking out $0.20 x 9,800 = $1,960.

Will you be eligible/entitled to this RI? From these two dates, you'll know that you need to buy on or before 25th January, and hold till the end of 25th January for you to be eligible for the "98 for 100" offer. If you decide to buy another 100 units from the market on 26th January, you won't be entitled to another 98 rights units.

It was mentioned at the start that RIs are tradable. From this section, you'll know that you can trade the rights that you were entitled to from 1st February through 9th February.

As you can see here, First REIT Rights (listed as a separate ticker GAAR.SI), traded between 1st and 9th February. Only those who hold it at the end of 9th February will be allowed to pay for and get the 20 cents Rights Shares.

Typically in Singapore, one would either go to an ATM and apply/pay for it (if shares are held through CDP), or apply/pay through custodian platforms (eg. Tiger Trade). For custodian, please check with them regarding the deadlines. For ATM applications, you'll have to pay the amount ($1,960 in this case), along with a $2 transaction fee, by 16th February night.

If you had paid up, you'll be able to trade these new (9,800) shares on 24th February on the market, through the normal AW9U (First REIT) ticker, along with your previously held shares.

To summarize, this was the rough timeline that investors should look out for regarding this RI. The components will roughly be the same for other RIs from other companies.

Preferential Offering

For POs, because they are essentially RIs without the ability to be traded, the process is much simpler. We take the recent MINT PO as an example. I'll use this example to explain a few additional things that commonly take place.

Here, we see that the offer range isn't a static value ($0.20 in First REIT's case). It instead spans from $2.57 to $2.64. A finalized value will be announced at a later date. We also see that with the PO of 117,576,607 units, MINT will raise roughly $300 million as a lower bound.

Note: PO price was finalized at $2.64 with a subsequent announcement.

Another difference here is that there is an Advanced Distribution. MINT usually pays out every quarter. Since new units will be issued in the midst of a quarter, an Advanced Distribution will be paid out to ensure fairness between existing and new units.

Record date comes after Ex date. In this case, the Record date is on a Monday, so the Ex date will be the Friday prior - 28th May 2021. 28th May is also the "eligibility date" for PO, meaning that you need to hold shares on the morning of 28th May to participate in the PO.

Similar to RI, there is also a time window to apply and pay for the PO shares (3rd to 11th June). If applied successfully, shareholders will get the new shares on 21st June.

Here's a timeline of what to expect for MINT's PO.

Private Placement

As mentioned previously, PPs are generally not very accessible for retail investors. Here's a case study using the same MINT announcement.

As you can see, PP is done very quickly. Note that the announcement was made on 20th May, meaning that there was only a 1 day notice period for PP eligibility. Retail investors can try their luck with their broker if they are interested in this.

PP-issued shares will be listed on 1st June. Do take note that PP shares aren't eligible for AD or PO. 

Extra Information and Disclaimers

Some stuff that I didn't touch on above.

Typically, you'd be able to apply for more than you are entitled to. Generally, if you are entitled to a weird number like... 540 shares, and you apply for 600, you'll get it. But it's not guaranteed! 

The snippets that I went through above tells investors the *essential* information, basically when to buy, how much to pay, when to pay. Apart from this, one should also check out how much price discount there is, how diluted will the shareholding be, and whether you agree and support the decision to raise funds based off the Manager's rationale.

Cheap shares are not always good. As an investor, you will have to weigh the pros and cons, coming up with a personal decision.

With that, you've reached the end of a lengthy tutorial! Hopefully this is a useful piece for new investors :) Feedback welcome (email or... whatever platform you saw my post from).

Cheers,

InvestingNugget