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 Bear in mind that the net asset value numbers that go into calculating the final asset cover may be out of date for funds that invest in assets such as private equity and property.

October Zeros warrants and subscription shares

Comments, New issues and maturities

GLI Finance has published its interim results for six months ended 30 Jun 2019 and they do not make good reading. The NAV has fallen again but more importantly for ZDP holders, there isn’t enough free cash to repay the zeros when they fall due. The statement says “The repayment of our ZDPs on 5 December 2019 remains at the forefront of our mind and we have made good progress acquiring those which have become available in the market over the last 12 months. We have spent GBP9.4m on buybacks up to the date of this report with a total of 7.9m ZDP shares now held by the Group. This has reduced the ZDP liability to GBP16.8m at the end of August 2019. Whilst we are focussed on selling down our on-balance sheet loan exposure and using cash assets, there will likely be a near term funding gap as loans take longer to repay. We have been exploring several options to fund this potential gap. This includes letting a portion of the ZDPs run past the scheduled repayment date and repaying the liability as liquidity becomes available to enable the Company lawfully to redeem the ZDPs, which although contemplated by the Company’s articles of incorporation and the ZDP prospectus, is not our preferred route. We have engaged with the major ZDP holders and are looking into the potential extension of the current ZDPs for a further year with a coupon of 7% or issuing further Bonds under the current Bond instrument.

Taking into account the varying possible outcomes of factors and assumptions listed above, these constitute a material uncertainty that may cast significant doubt over the Company’s and Group’s ability to continue as a going concern, such that it may be unable to release its assets and discharge its liabilities in the normal course of business. The Directors expect that if they are able to action the mitigations being considered above, the material uncertainties will be extinguished.”

The ZDPs that GLI Finance has bought back to date have been acquired at less than their NAV, enhancing GLI’s NAV. However, a significant proportion of the NAV relates to the goodwill attributed to the group’s investments in two Sancus companies (Jersey and Gibraltar – totalling £22.9m) and the rump of the fintech portfolio (£8.7m).

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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