Chart: Armada's daily chart as at Sept 15, 2011 (Source: Tradesignum)
Imagine how much premium has been squeezed out of each CW. If it is any consolation, the exercise price of all these CWs (except for Armada-CF, CH & CI) are still below the current market price of the underlying share. This means that the CWs (except for Armada-CF, CH & CI) have some intrinsic value. As readers are well aware, CWs value comprises two components- the intrinsic value (which is calculated by deducting the exercise price from the market price & then divided by the exercise ratio) and the conversion premium. The latter is the wild card & it depends on the overall market sentiment as well as the performance of the underlying share. In the current market environment, the conversion premium cannot be good.
I have tabulated the CW's valuation below (as Table 1). Since my earlier post, another two CWs were issued. We can see a decline in value of more than 30%. The exceptional case is Armada-CG, which dropped by a smaller percentage of 20%. That CW is hardly traded & the reference price may not be the fair price. In fact, only 4 of these CWs were traded today. They are Armada-CA, CC, CD & CE. Without active trading, the fair value of the CWs is hard to determine.
Table 1: Armada's CW valuation table
Table 2: Armada's first 7 CWs prices on July 29 & September 15
When I was preparing this post, I've also checked on the number of CWs issued for the largest IPOs in the past 3 months, such as MSM, PChem & MHB. I was quite shocked to see that there are 10 CWs & 1 PW issued for PChem alone! Structured Warrants, the gift that keeps on giving.
2 comments:
Structured Warrants are simply a way for the issuers to short a counter that we the retail client are prohibited from doing. Double standards that favor the big boys!!!
Hi neal
What you said is very true. The issuers knew the market was very high in the past few months and issuing CWs then was a sensible move. It is not a sure thing but they were well worth the risk for the issuers. The retailers were partly to be blamed for lapping up all the CWs issued. They should have compared the market prices of the underlying stocks against the target prices issued by many research houses & they should have avoided these CWs.
Finally, we must note that warrants- whether company-issued or structured warrants- are to be avoided in a bear market.
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