Rights Issue

A rights issue is an offer made by a company to existing shareholders to subscribe to further securities in proportion to their current holdings. The rules state the offer must be kept open for at least 21 days. During this period the rights will trade separately as nil paid rights, which allows shareholders to sell and other investors to buy. If the issue is fully underwritten then any shares not taken up will be mopped up by the bank.

In the current environment most of the new issues are being offered at a substantial discount to the existing shares. What this means in practice is that as soon as the stock goes ex-rights it will drop down to the theoretical ex-rights price. This is calculated as the weighted average of the existing share price and the cost of the new rights. The nil paids are effectively a deep in the money call option and these will trade close to their intrinsic value. This is the difference between the theoretical ex-rights price and the price being asked for the new shares.

The price movement of the shares will depend on whether the announcement of the rights issue was anticipated or not. It is also a question of whether the market interprets the move as positive or negative given the company’s current position and reasons for the action. Rights issues have been the most prevalent form of corporate activity this year with businesses using them as a means of raising new capital to strengthen their balance sheets.

Those who invest via a spread bet are entitled to receive all the benefits of any corporate action (including a rights issue) on the underlying shares. If they have a stake when a company undergoes a rights issue they may be able to sell the rights for cash, otherwise their provider will simply adjust the number of holdings on the effective date.

Rights issues provide plenty of liquidity and give traders the opportunity to go long or short depending on how they think the market will interpret the move – this could be anything from relief at securing the lending, to disappointment the company needs so much new cash.