The LepakInvestor Guide to Rights Issues

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I was informed by a friend to write in detail about rights issues, as there seems to be a trend of companies and business trusts/REITs raising capital recently. This is my interpretation of rights issues, and you might think differently, like what others have done so. Note that this guide requires a little bit of understanding beforehand, and thus I won’t handhold you.

One can always certainly apply for excess rights, but one must take into consideration that the rights issue may not be underwritten, and thus you have a higher chance of getting your full allocation. This might not be obvious at first, but in the case where the rights are not fully taken up (i.e. >100%) by all shareholders, you run the risk of being over-allocated, or have a short-term cashflow issue if you “over-invested” through the rights application.

For example, Alice has invested $2,000 in 1000 units of Descendas Hospitality Trust (DHT) at $2.00. DHT has declared a rights issue of 100 rights for every 1000 units for $1.00 each. Alice has decided to subscribe for her entitled 100 rights units and also subscribe for 9,900 excess rights. In total, she wants to apply for 10,000 units and thus she pays $10,000 to DHT.

When the application results are announced, it is known that the subscription rate of the rights issue was terrible – only 50% of their rights was subscribed by its shareholders. Alice was allocated all 10,000 units. This is because there were plenty of rights units available, and thus there was a high chance that Alice would have all of her excess rights allocated to her. Had Alice been more prudent, she would’ve just applied 1,000 rights and paid $1,000, and not over-allocate her portfolio to DHT.

Usually, this is something I wouldn’t recommend, as the rights units are usually traded very close or at a premium to the issue price of the rights, so that it matches the current market price. Unless you have the time and enough money to buy the rights at a price where the rights issue price + rights premium  is less than the mother share’s price , it’s probably a value-destructive action, and you are definitely better off just applying for excess rights normally.

That’s all that I can think of for now. I will add on to this blog post in the future if and when there are any changes, or if there’s something useful to add on.

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