Rolling instalment warrant - what happens on the reset date?

[joe2000]

Hi,

I have a number of rolling instalment warrants which I bought a few months ago. My question is what is going to happen on the reset date?

Thank you.

 

[sails]

Hi Joe,

I have never taken them to the reset date, so not exactly sure either. However, here is a link to some info on the ASX site: http://www.asx.com.au/investor/warrants/how/rolling_instalments.htm and it looks like the terms and conditions may vary depending on the issuer.

Hopefully someone else can offer you help, but if you don't get any replies suggest you phone the warrant issuer and/or ask an ASX warrant expert by using this form: http://www.asx.com.au/asx/about/Feedback.jsp

Cheers

 

[Magdoran]

Hi,

I have a number of rolling instalment warrants which I bought a few months ago. My question is what is going to happen on the reset date?

Thank you.

Hello Joe,


Margaret is spot on with her advice here. I saw this earlier, but was flying interstate the last couple of weeks, so didn’t have time to address this question.

Joe, you really should read the issuers terms and conditions, as well as fully read up on instalment warrants if you are going to invest in them. I have quoted an excerpt out of the ASX issued PDF on Warrants below for your information. A lot depends on the strike price you bought and if this is ITM, OTM or ATM, and how the issuer structures the “funding” cost (essentially an interest component and fees for the issuer to hold the warrants on your behalf).

It’s kind of like taking out a hire purchase loan on a car - you get to drive it, but you have to pay the yearly payments on it, and pay the residual amount due to own it outright. Try thinking of it in these terms. The rollover is essentially the next payment to continue to use the car. See the conditions set out below for more information.

From the ASX PDF on Warrants

Rolling Instalments

Rolling instalment warrants are a variation on the instalment structure. They have a much longer life (up to 10 years) but each year there is an annual ‘reset date’ when the holder will be charged another 12 months worth of funding costs. At this time the issuer may also adjust the exercise price (often called the “loan amount” of the instalment) with the objective of maintaining a desired gearing level (for example, the exercise price may be adjusted to keep it between 40% and 60% of the current market price of the underlying instrument). The issuer may either;

1. Reduce the exercise price (loan amount). In this case, holders will be asked to make an additional cash payment in order to reduce their loan and prepay their funding costs for the next 12 months.

2. Increase the exercise price (loan amount). In this case the issuer may make a payment to holders equal to the amount of the increase less funding costs for the next 12 months (this may either be in cash or in the form of a reinvestment in additional instalments).

3. Retain the exercise price (loan amount) unchanged. In this case the holder will be required to make a payment to the issuer for the prepayment of funding costs for the next 12 months. On the annual reset date you may choose to exercise some or all of the instalments and take delivery of the underlying securities, cash out the warrant, roll into the following year (by agreeing to pay any additional amounts necessary) or do nothing. If you do nothing you are deemed to have accepted the new exercise price and will automatically roll into the following year. If there is an amount due on a series on the annual ‘reset date’, and you don’t pay this amount, the issuer may terminate some (or all) of your instalments and use the proceeds to meet the amount due. Conceptually, these warrants can be explained as a series of consecutive one year instalment warrants with the exercise price being reset each year.

During the period surrounding each ‘reset date’, investors should take care to consider the effect of a change in the exercise price on the value of the rolling instalment. Information on an upcoming reset can be obtained from the warrant issuer or from ASX.

Regards


Magdoran