Saizen Reits had previously announced a Rights Issue to help in the repayment of their CMBS loans. The proposed fundraising will help Saizen pay off their loans up to 2010 and give them a stronger position to negotiate their other loans that are maturing in 2011.
Sharesholders of Saizen will be given the rights to subscribe for 11 Rights Shares at a price of S$0.09 for every 10 shares of Saizen that they hold.
This works out to be 497,185,362 Rights Shares that will be available. If fully taken up, it will raise $41.1 million for Saizen.
One difference of this Rights Issue from most other ones is that shareholders will be given 1 free warrrant (with a 3-year expiry) for every Rights Shares that they subscribe for. The exercise price of this warrant is also S$0.09. If fully exercised, this will raise another $44.75 million.
This free 3-year “call option” provides an added incentive for shareholders to take up the rights issue.
Based on the 2008 financial statements, the DPU per unit will drop from 4.9 cents to 2.48 cents (adjusted for rights) and 1.72 cents (adjusted for rights and full exercise of warrants).
The NAV per unit will drop from $1.04 to $0.54 and $0.38 respectively.
Options available to unit holders include:
- Sell off Saizen shares before ex-rights date.
- Subscribe to rights.
- Subscribe to rights and excess rights.
- Sell off rights.
- Subscribe to some rights and sell off the rest.
- Subscribe to some rights and sell off some shares.
- Do nothing. (worst option)
As this Rights Issue comes with free warrants, option 4 and 5 might not be optimal options.
For example , let’s look at someone has 10000 shares. He will be given 11000 rights. If Saizen trade at $0.12 after ex-rights date, the Rights should trade around $0.03 (0.12-0.09).
Say the investor does not wish to put in any more money to take up his Rights. Instead of selling off all the rights, a unit holder should sell off all his mother share and subscribe to the same number of Rights Shares. He still ends up with the same number of units.
If he sells off 11000 Rights, he will get back $330.
If he sells off 10000 shares and 1000 Rights, he will get back $1230. Using $900 to subscribe for 10000 Rights Shares, he will be left with $330.
In both cases, there is no difference in the amount of money he gets back and number of shares left. However, using the second method, he will be given 10000 warrants with an exercise price of $0.09. This gives him a “free” option to participate in future upside of the share price.
Note the Rights might trade at a slight premium due to the free warrants effect.
For example, 3.5 to 4 cents in the example I gave. Then an investor who wish to sell off all his rights would have to consider whether the premium is worth paying (disposal of rights using the second method) to get the warrants.
Key dates are as follows:
Units trade ex-rights – 4 May 2009
Commencement of trading of nil-paid rights – 11 May 2009
Last day of trading of nil-paid rights – 19 May 2009
Last day for subscription and payment of Rights Shares – 25 May 2009 at 5pm
Expected date of trading of Rights Shares – 4 June 2009
Expected date of trading of Warrants – 5 June 2009