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Zeros warrants and subscription shares

This section of the website replaces our monthly research notes on zeros, warrants and subscription shares. We’ll update the valuation sheet here at least monthly. Bear in mind that the net asset value numbers that go into calculating the final asset cover may be out of date for funds that invest in assets such as private equity and property.

November Zeros warrants and subscription shares

We recently added an extra column to the warrants and subscription shares sheet (at the suggestion of one of our readers – thank you!). There are now two discount/premium columns. The first “price/exercise (discount)/premium” is looking at how far in or out of the money the warrants or subscription shares are. The second, additional column “price+warrant or sub share price / exercise discount/premium” is looking at whether it make sense to buy these warrants or the subscription shares at their current price.

Our definition of cover for the zero dividend preference shares is a simplified one from that used by some others in the market (see below). For example, Jupiter Dividend & Growth’s cover is less than one according to some estimates, largely because of estimated wind up costs.

Comments, New issues and maturities

UIL Finance has announced that holders of 17,126,384 2018 ZDP Shares (representing approximately 34.4 per cent. of the total number of 2018 ZDP Shares in issue) chose to rollover their investment into 26,717,110 new 2024 ZDP Shares, on the basis of each 2018 ZDP Share converting into 1.56 2024 ZDP Shares. In addition, 3,282,890 2024 ZDP shares were placed with new investors and 20m new 2024 ZDP shares were placed with UIL Limited, to bring the total number of 2024 ZDP shares in issue to 50m. The new zeros will start to trade on 2 November 2017.

On 31 October 2017, JPEL redeemed and cancelled its 2017 Zero Dividend Preference Share Class (Ticker – LSE: JPSZ). The Final Capital Entitlement of the 2017 ZDP Shares is approximately £32.5 million and will likely be financed by cash on hand and the utilisation of the Company’s low‐cost credit facility. As at 30 June 2017, the 2017 ZDP Shares represented approximately 8.8% of JPEL’s net asset value. Cash proceeds should be received on 14 November.

On 11 October 2017, EJF Investments announced that it was planning to raise £20m through a new issue of zero dividend preference shares. the target is to issue these with a five year life, an initial cover ratio of 4.9x and a gross redemption yield of 5.75%.

Definitions

Zero dividend preference shares or ZDPs are shares that will be redeemed at a fixed price at some defined point in the future (provided that sufficient assets are available). Their entitlement to the assets of the company rises in a straight line between their entitlement on issue and their redemption value. They are not entitled to receive dividends. They will usually get paid out before the ordinary shares on a winding up.

A warrant is an instrument that gives the holder a right but not the obligation to buy ordinary shares at a pre-determined price (the strike price or exercise price) on a given date or within a range of dates.

Subscription shares are identical to warrants but they are eligible for inclusion in an ISA while a warrant is not.

The ZDP cover ratio / Zero Dividend Preference share cover ratio is an indicator of the likelihood of a split capital company being able to repay its zero dividend preference shares (ZDPs) when they fall due. The method of calculation varies from firm to firm but, for the purposes of producing our monthly sheet on zeros we have adopted the following method.

  1. take the gross assets of the company (based on the latest available net asset value including accrued income) and adding back bank debt
  2. deduct bank debt (unless it specifically ranks below the zeros – but this is unlikely)
  3. deduct the final capital entitlement of any prior ranking zero dividend preference share issues
  4. divide the resultant number by the final capital entitlement of the ZDP issue for which you want to calculate the ZDP cover ratio

Some other measures of ZDP cover try to adjust the calculation for management fees, interest on debt and estimated wind up costs. We think this gives a spurious accuracy (since it is hard to forecast some of these expenses) to what is really only just a rough guide to whether the zero will easily be repaid out of available assets when it falls due.

Gross redemption yield or GRY is a measure of the rate of return offered by an investment up until the date it matures. It is usually expressed as an annualised percentage – a bit like an interest rate. NB, as ZFPs near maturity, annualised GRYs can get a bit distorted – also dealing costs (which our sheets do not factor in as they vary) become more of an issue.

 

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