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Zeros, warrants and subscription shares

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 Bear in mind that the net asset value numbers that go into calculating the final asset cover may be out of date for funds that invest in assets such as private equity and property.

January Zeros warrants and subscription shares

Comments, New issues and maturities

JZ Capital clarified the reasoning behind its 90 cent per share write down in the value of its property exposure when it announced its NAV on 20 December 2019: “Currently, the Borrower, in which JZCP is an investor, is in negotiations with the Lender on the Design District assemblage to sign a non-binding term sheet for a Forbearance Agreement, which will relieve the Company of more than $30 million in expected carrying costs for the Design District in late 2019 and calendar year 2020. The Borrower is contemplating signing a non-binding term sheet by December 31, 2019 and a definitive Forbearance Agreement by late January 2020. As currently contemplated, the Lender will take approximately 40-60% of the equity of the Borrower upon execution of the Forbearance Agreement. Although no term sheet or definitive agreement has been executed, the Board has decided to take an approximate 50% markdown as of November 30, 2019 against JZCP’s equity value in the Design District as of August 31, 2019, in anticipation of entering into this Forbearance Agreement. A markdown of this nature was contemplated within the range included in the announcement made by the Company on October 30, 2019. Alongside the Lender, the Borrower contemplates attempting to sell the property with an ultimate anticipated sale date by the end of Q2 2020.”

The asset values of Aberforth Split Level, Acorn Income and Chelverton UK Dividend all leapt on the Tory election win, improving the cover on their zeros.

Earlier updates are available here


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.

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.

There are two discount/premium columns in the valuation sheet. 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.


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