Jump to content

Bank warrants


treasurehunt
 Share

Recommended Posts

Have any of you been looking at investing in the warrants issued by banks as part of TARP repayment? For example, JP Morgan's warrants trade on the NYSE under the ticker JPMWS. I think WFC and BAC warrants should be getting auctioned in the next few months.

 

The JPM warrants have a $42.42 exercise price, expire in Oct 2018 and are currently trading at $13.18. JPM is too complex for me, but if you think the company will do reasonably well over the next nine years, the warrants could give much higher returns than the stock itself. I think one key factor is whether the exercise price gets adjusted for quarterly dividend distributions. The verbiage in the prospectus was too confusing for me to figure this out. Does anybody here know the answer? Here are some relevant excerpts from the section titled "Adjustments to the Warrants":

 

In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares deliverable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.38, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

The entire prospectus is here if you want to take a look: http://www.sec.gov/Archives/edgar/data/19617/000119312509249391/d424b7.htm

Link to comment
Share on other sites

Have any of you been looking at investing in the warrants issued by banks as part of TARP repayment? For example, JP Morgan's warrants trade on the NYSE under the ticker JPMWS. I think WFC and BAC warrants should be getting auctioned in the next few months.

 

The JPM warrants have a $42.42 exercise price, expire in Oct 2018 and are currently trading at $13.18. JPM is too complex for me, but if you think the company will do reasonably well over the next nine years, the warrants could give much higher returns than the stock itself. I think one key factor is whether the exercise price gets adjusted for quarterly dividend distributions. The verbiage in the prospectus was too confusing for me to figure this out. Does anybody here know the answer? Here are some relevant excerpts from the section titled "Adjustments to the Warrants":

 

In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such amount and/or fair market value, the “per share fair market value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares deliverable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the per share fair market value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

“ordinary cash dividends” means a regular quarterly cash dividend on shares of our common stock out of surplus or net profits legally available therefor (determined in accordance with generally accepted accounting principles in effect from time to time). Ordinary cash dividends will not include any cash dividends paid subsequent to October 28, 2008 to the extent the aggregate per share dividends paid on our outstanding common stock in any quarter exceed $0.38, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

 

The entire prospectus is here if you want to take a look: http://www.sec.gov/Archives/edgar/data/19617/000119312509249391/d424b7.htm

 

 

Apparently, the exercise price is adjusted downward to reflect any distributions to shareholders except for the amount of regular dividends not exceeding $.38/quarter.

Link to comment
Share on other sites

I think one key factor is whether the exercise price gets adjusted for quarterly dividend distributions. The verbiage in the prospectus was too confusing for me to figure this out. Does anybody here know the answer?

 

 

The warrants won't be adjusted for any dividend that is equal to or less than $.38 cents.

 

-Check out page S-13...

 

the exercise price of, and the number of shares underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.38 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury in October 2008.

Link to comment
Share on other sites

A word of caution. These warrants are fully priced according to B/S.  The implied vol is rather high, about equal to the historical vol which is high because of the recent volatility associated with the financial crisis.

 

Nevertheless, these could still be efficient if you like owning JPM long term.  However,  you'll have to forego the dividend if you buy the warrants instead of the stock.

Link to comment
Share on other sites

The warrants won't be adjusted for any dividend that is equal to or less than $.38 cents.

 

-Check out page S-13...

 

Okay. That looks definitive.

 

The warrants are still pretty attractive if you think the stock is undervalued. Let's assume that JPM restores its dividend to 38c next quarter and maintains it from then on. Ignoring the time value of the dividends, I calculate that the break-even point between stock and warrants is a stock price of $71 or so in Oct 2018. Here's the calculation based on yesterday's prices:

 

Exercise price of warrant: $42.42

Price of warrant: $13.17

Total return on warrant if the stock price is $71 in Oct 2018: ($71 - $42.42) / $13.17 - 1 = 117%

 

Price of stock: $38.87

Dividends from now till Oct 2018: .38 * 4 * 8.5 = $12.92

Total return on stock if the stock price is $71 in Oct 2018: ($71 + $12.92) / $38.87 - 1 = 116%

 

For the stock to be at $71 in Oct 2018, it would have to go up by about 7.5% per year. So if you think the stock will rise by more than 7.5% per year, the warrants are a better buy. Of course the warrants are riskier as well.

 

Link to comment
Share on other sites

A word of caution. These warrants are fully priced according to B/S.  The implied vol is rather high, about equal to the historical vol which is high because of the recent volatility associated with the financial crisis.

 

Nevertheless, these could still be efficient if you like owning JPM long term.  However,  you'll have to forego the dividend if you buy the warrants instead of the stock.

 

BS has proven to be rather faulty the longer out you go. That's what Buffett and Munger say and that's what it looks like if you value these warrants the way of value investor and not an academic would. Just make some reasonable assumptions on where you think JPM will be in 9 years.

 

 

Very true!  But, if you can buy 'em a lot less than the B/S value, you've got a nice margin of safety.  :)

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...