Monday, September 18, 2006

Queries On Genting & Call Warrants

doraiddd said...
hi dali, perhaps if the tight old beancounters so adept at kiasuness there did not put such a tight squeeze on the fees, yields and spreads, given the current market conditions, the investment bankers would've made their chinese walls a bit more transparent ala david copperfield?? and does anyone seriously think the kiasu kings down south would award their only pleasure island to a MALAYSIAN company thats already taken so much money from their countrymen for the last few decades? somemore without even a local partner? (unless they commit, say, 6 bil US? hahahah just like TM (aka Totally Mad Bhd?) buying M1.. another hahahah) I would rate genting a SELL (on strength-lar..) the research houses are still being too kind.different matter - i hope david's got nothing to do with the landmarks buy??..

gsg said...
hi, any chance you have take a look at Genting international, do you think it is a buy at current level 33-34ct, before the award of the Sentosa IR?

My Take - There is a lot of positives being priced into Genting at the moment. They have a slice of London Clubs, which is being bidded a lot higher by Harrahs. They look to be in the driving seat to secure Stanley Leisure. Even though their NTA will get whacked, properties like that does not come around so often. The casino business is quite competitive and there are not that many areas left where you could put your foot down. Growing organically is also very difficult. Las Vegas and Cotai strip are saturated, or in Macau's case, getting saturated. The last 2 bastion where there is concentrated population with high liquidity are HK/China and UK (Europe and Australia are too dispersed in numbers), hence you need to be there. Like it or not, Genting has to be an international casino player, if not, it will get marginalised (look at Resorts World). As for the Sentosa thing, most people are pricing in a 70% success chance. Hence the upside is limited even if Genting gets it. But the sell down could be bigger if they don't get it. (I think they will get it... ). As for Landmarks, its a silly move, and I'm sorry but I think DC has his fingerprints all over that deal. The assets within Landmarks are OK, especially the power plant. The hotels are OK also, but in the eyes of everyone they will perceive that the casino license in Bintan might be a lure. In the eyes of the assessing committee for Sentosa IR, you don't need to give them that kind of doubt in their minds that should Genting not get Sentosa, then they will try to compete with a mega casino in Bintan. The whole thing leaves a bitter taste in the mouth. The timing of the deal sucks, better to have not done it. As for the Singapore authorities, I think they will handle it professionally, yes, bad blood and everything, but Singapore also needs Malaysia, plus the big sell-off every now and then (Alliance Bank, big buildings, etc..). Plus this one, Genting International will the vehicle, listed in Singapore, it will allow for Singaporeans to have access to the growth of the company, all things being equal.

sopskysalat said...
hi there, can you elaborate further on the following "The double whammy came when Resorts World just raised RM1.1 billion in a convertible note issue, lead managed by CIMB. Wallah… in less than a week, CIMB came up with a 100 million call warrants on Genting. A call warrant necessarily means the issuing house is betting on no-conversion or that the Genting’s stock price will be flat or down in the near future." If they issued call warrant, shouldn't the issued manager deem bullish on the counter? I do not get you on why it is deemed bearish and it is linked to no conversion of the note?


My Take - Again, all things being equal, an issuer of a covered/call warrant does not need permission from the company or owners. They make money from the issue price of the CW. If I were to take RHB Cap at RM2.70, I could issue a CW probably at RM0.27, thus giving it a 10x gearing. When you buy the thing at issue price, I will pocket the premium (27 sen). If I issue 20 million, I get RM5.4m. Assuming the conversion price is also at RM2.70 over 10 months, you would only seriously consider converting if the share price traded above RM3.00 - that's because you bought the CW at 27 sen plus you would have to pay the conversion price of RM2.70 = RM2.97, and you add in the commissions, so RM3.00 is the bare minimum before you would want to convert. So, there is a huge comfort zone for the issuer. However, if RHB Cap is involved in a takeover catfight and rises to RM3.40, there will be plenty of conversion demand, and the issuer will have to come up with RHB Cap shares at RM2.70 to deliver or pay the difference. So, an issuer generally is betting for a flat or downtrending share price in the near future.

Of course, an issuer could hedge by buying all the necessary shares at RM2.70 first in anticipation - but who bears the cost of buying and holding the bloody shares? What if the shares then drop to RM2.50, who bears the losses? That would totally wipe out the 27 issue price profit! A prudent issuer of CW would have some sort of hedging strategy ( I hope). A very simple and riskless one would be to engage the owners of the shares to sign over an option. For example, I could go to Lim Kok Thay and ask him to sign over an option to allow me to buy 10m Genting's shares at RM24.50 for 10 months. In return for that, I may have to share the premium/issue price with the owner, but I am covered totally. There are other trading strategies and hedging strategies that can be employed when issuing CW, and in managing the position over the time span, but generally you want the share to go down for maximum profits.

That should be simple enough, get a bad share... but the issuer's dilemma is they also need a share where there has substantive interest, hence the IOI Corp covered warrant and now Genting. It also needs to have decent free float and share capital - so that it will be very hard to manipulate and not get hit by sharp syndicates. Can you imagine, doing a CW on Tebrau? It will be popular, my god, the volatility!!! Buyers of CW need to be careful, the issuers are always giving out wonderful names to invest such as Maxis, Genting, Astro, IOI, etc... they all have good fundamentals and seems an easy buy, plus the gearing is the big lure, isn't it. But as an issuing house, I have two factors in my favour, one is time premium, which dwindles down very fast. The other is the secret weapon that nobody will tell you - these stocks all have VERY LOW VOLATILITY or beta, means they do not move up and down like a yo-yo but tracks the index very closely. A warrant of any kind is a geared instrument, which lives and breathes on volatility, a thing that has no volatility, might as well go and put into time deposit. I think I can issue a CW now with great confidence, Petronas Gas at RM9.00, I will be generous la, I give you gearing of 15x at an issue price of RM0.60. Conversion at RM9.00 over 10 months. Can you see me laughing to the bank... heck I can even make it sweeter for you by giving you 20x gearing la at an issue price of RM0.45. I'd probably still pocket the premium as the stock probably won't go anywhere in 10 months. So approach ALL covered/call warrants with caution.

9 comments:

zentrader said...

I think in layman term CW is like someone selling you the bus ticket from JB to KL but this guy in actual fact don't even have a bus to start with. He just hope that you are not going to use the ticket at the first place. :)

khlim said...

Hi, please don't forget that if one write naked call options(call warrant) with low implied volatility with the idea of being vol bank like LTCM, one must be able to handle the so called 10 sigma event as prudent risk management. Too much leverage is always not good. Look at what happened to LTCM. Too many fat-tailed phenomenon has been observed already.

doraiddd said...

hi dali,
i bet you 10 bucks jenntiing not gonna get sentosa.

you still owe me some moolah from before and you're not allowed to buy any covered warrants with my winnings.

doraiddd said...

btw DC = David Copperfield??? Now you see it, now you dont!

i'd better cabut before he loses his temper and yells at me.

hahahahahah...

sopskysalat said...

doraiddd,

firstly, i wouldn't use the fact that genting, being a malaysia company, will lose out on the race for the ir. sands, a sole player, has outwitted the 2 players with local partner, capitaland and keppland. many would not have even think either one will lose. what dali mentioned make sense and genting is smart to relocate the listing to sgx. local investor will take a win-win partnership in participating in the growth of genting, be it organically or non-organically.

thanks dali for your write up on the CW. well, it may be prudent enough to say by having the share price going down, the issue manager will profit the cost of the warrant. but i am not too sure about their hedging strategy as they may also quiet accumulate a big chunk of the mother shares in advance to prepare for the issue. that's why, we do see some usual liquidity in the shares before anything has happened.

interestingly, what if the mother share price drops below the conversion, and they are holding on to some of it, what you reckon? issue again? i would think they may just dump the whole chunk out again... probably...

some food for thoughts. say a company issue a convertible notes at $2.50 when the current price of the share is $1.80. naturally, many investors will presume that is the idea benchmark for the price to march towards it. i think it is foolish to have that thought.
guys, what you think?

sopskysalat said...

hi dali again,

can i just say, put warrant is the opposite of CW? they are bullish about the movement?

just wondering. thanks a lot. i am learning a lot of corporate finance insight from you.

Salvatore_Dali said...

The reason why the conversion px for CW are very close to their current mkt px is that their time to expiry is usually less than 12 months. Its a time value thing, if you issue a normal warrant say with 4 years to expiry, you'd be silly to do it at mkt px, hence you can mark it up 10% to 15%. Everyone must know that in a corporate warrant situation, there is dilution when there is conversion, in CW there is no dilution.

Another important factor in normal corporate warrants is that they are issued as part of a convertible bond issue, you then strip out the convertibility to shares portion and call it warrant, the remainder becomes a straight bond with a certain interest rate fixed and payable. Many company rely on investors converting into shares so that the conversion money would be sufficient to pay off the bond when it comes due. If not, many companies often struggle with the refinancing of the bond when it comes due.

zentrader said...

Dali, last time you mentioned about Aeneas Hedge Fund proved to be real. Any more news on this? And how this will affect our overall market?

Salvatore_Dali said...

Well, ty for remembering, at least the Mobif withdrawal does not look so bad now. Legal permutations abound, stay away from ALL related counters such as Iros, Mobif, Farm Best, Satang, Polytower, etc... the shit has hit the fan but there seems to be more shit coming. The worst, unfortunately is not over yet. Besides Coper Aul and the fund managers, the incriminations could go as deep as some top remisiers and company owners. So, beware, stay away, if have to trade, but some palm oil or bank M&A stocks la... Don't go catching falling swords, can be quite bloody.