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So what happens when you buy an installment warrant?

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Sunder

Sunder

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... And probably didn't realise?

How will Mrs He find the $65m?

* Scott Rochfort
* November 10, 2008
*

A $32,300 investment made by a Melbourne housewife threatens to create a headache for the toll road group Brisconnections and the underwriters of its next two $408 million security instalments, Macquarie Group and Deutsche Bank.

Brisconnections remained unclear over the weekend whether its newest substantial shareholder, Mrs Fang He, would be able to cough up $65 million to fund the toll-road's next two $1 security instalments.

The company was caught off guard on Friday by a shareholder notice which showed Mrs He had snapped up 32.3 million securities, or a 8.26 per cent stake in the company, at 0.1c each.

The stake cost $32,300, or one-thousandth of the July listing price of Brisconnections' first instalment. But for the next two instalments, Mrs He is obliged to pay the initial listing price of $1.

When contacted by the Herald, Mrs He was unable to say if she could fund the instalments.

"I am only a housewife. My husband is running this business in my name," said Mrs He, who jointly owns the business Wang & He Investment with her spouse. Her husband did not return calls.

The investment makes Mrs He the toll road's second-largest shareholder behind the Queensland Investment Corporation.

The purchase means Mrs He is obliged to buy 32.3 million of the next two $1 instalments. Mrs He, who has registered her shareholding from the address of an aluminium window business in the Melbourne suburb of Springvale, will need to pay $32.3 million when the second instalment is payable on April 29, then $32.3 million when the final instalment lists in early 2010.

In all, Brisconnections plans to raise an extra $817 million from the next two instalments to help fund the $4.8 billion toll road project in Brisbane.

"All shareholders who have bought into the stock would be fully aware of their obligations in respect to the second and third instalments," a Brisconnections spokesman told the Herald.

The spokesman said the company had "no reason to believe at this stage" that any of its shareholders could not fund the next two instalments.

If the instalments cannot be fully funded by securityholders, Macquarie Group and Deutsche Bank, as the underwriters, will have to make up any shortfall.

Construction of the toll road project started last week.
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I'm suspecting a glazier doesn't have 65 million or so. Will they just be sued for the amount and seek bankruptcy protection?
 
Re: So what happens when you buy an installment warrant

Funny you should mention that,
A newbie that started a thread on this subject also got caught out, luckily for him he traded his way out before payday.
 
Re: So what happens when you buy an installment warrant

Yeah, this isn't a hypothetical question, I genuinely am curious what happens!

I do vaguely remember someone posting something like that though. Might look up the thread and see if anyone had an answer.
 
Re: So what happens when you buy an installment warrant

I find it unbelieveable that this product could be listed on the asx in this form and that ASIC allows this sort of stuff to go on. It seems ludicrous that someone can buy an ASX listed instrument on market and suddenly find themselves with a huge, legally binding liability of this nature without having had to read or sign any documentation whatsoever. It is ridiculous.

If you look at the Opes prime situation and then situations like this you really have to start to wonder what ASIC is doing in relation to market regulation.

To trade instruments that can incur a liability greater than the initial outlay (e.g. options writing, futures, CFD's etc.) people are normally made to jump through hoops (read and sign documents, do tests to show they understand the rules etc. etc.). But here a company can stick some fine print buried in a paragraph in their prospectus that creates a huge liability for anyone that happens to end up holding the stock at a certain time.

If it was an optional payment and the only penalty was forfeiting of the shareholding that would be a different matter but my reading of the prospectus is that they will pursue the holders for the fully liability if they don't pay up the installment.

Mind blowing imvho.
 
Re: So what happens when you buy an installment warrant

All shareholders who have bought into the stock would be fully aware of their obligations in respect to the second and third instalments," a Brisconnections spokesman told the Herald
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This quote is absolute BULLdust.

How many people read every subsection of the companies prospectus when they buy a stock? Thats the only way someone would know about this liability. There are traders that scan for stocks and take entries without having the remotest clue what the company does - are they aware that they could potentially be incurring a legally binding liability thousands of times the value of the shares they've purchased?
 
Re: So what happens when you buy an installment warrant

With the instalments trading at 0.1 cents it is clear that the market considers a theoretically fully paid $3 share to be currently worth no more than $2 and most likely less. Having reached this point the market cannot value these securities.

If the issuer asked for $2 as the initial instalment, a 67% fall would have been needed (in terms of the $3 fully paid price) before reaching this point. I note that with the Telstra floats the first instalment was always bigger than the second instalment.
 
Hmmm ... it sounds like the Telstra warrants might have worked the same way - but they were well in the money so anyone unable to pay could always offload.

I was always under the impression that installment warrants were a bit like an option - the holder could pay and they would get a conversion to shares, but if they didn't then they lapsed with no additional liability.

Certainly a potential pitfall - particularly for the couple in this situation given that they can't easily unload the stock.

Still seems odd that someone can enter into this situation without all sorts of alarms and warning bells being blared at them. That you can spend $32k on the stock market and quietly buy yourself a debt burden of $60+ million :eek: doesn't really seem right.
 
$1400 is perhaps a small price to pay to avoid the bad publicity associated with a large number of instalment holders either unable or unwilling to pay the next instalment.

It could be the underwriters trying to mop them up for a token amount.
 
My reading of it is that the warrants get forfeited to the underwriters if they are not paid up, and the underwriter will have to underwrite the warrants so that the company gets the funds. The underwriter is now a holder of fully paid up shares ... but still gets to pursue the original holders for the funds. So it could be a windfall for the underwriters ... though by the sounds of it there will be quite a few holders that are not good for the money.

So how many unexpected bankruptcies and destroyed families and businesses will this leave in its wake?

Any newbie that spent a paltry $500 buying these things on market yesterday has now bought themselves a legally binding $500,000 dollar liability without having to sign a single document, and can lose everything they have if they don't pay it.
 
Cuttlefish, while I understand where you are coming from & there should be some sort of check before being able to buy these, surely there has to be some responsibility on the part of the buyers to understand what they are buying.
 
nomore4s said:
Cuttlefish, while I understand where you are coming from & there should be some sort of check before being able to buy these, surely there has to be some responsibility on the part of the buyers to understand what they are buying.
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I agree with Cuttlefish, you should definately have to sign something before becoming a shareholder in this type of security. This sort of thing could happen to any day trader.
 
cuttlefish said:
My reading of it is that the warrants get forfeited to the underwriters if they are not paid up, and the underwriter will have to underwrite the warrants so that the company gets the funds. The underwriter is now a holder of fully paid up shares ... but still gets to pursue the original holders for the funds. So it could be a windfall for the underwriters ... though by the sounds of it there will be quite a few holders that are not good for the money.

So how many unexpected bankruptcies and destroyed families and businesses will this leave in its wake?

Any newbie that spent a paltry $500 buying these things on market yesterday has now bought themselves a legally binding $500,000 dollar liability without having to sign a single document, and can lose everything they have if they don't pay it.
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I'm unfamiliar with these sorts of warrants - but if they are warrants, then a newbie shouldn't even be able to buy them. I know CommSec doesn't allow warrant trading without reading a form, signing it and sending it away. Same with Options, Margin Lending, etc. So, a basic brokerage account would never allow the individual to purchase these things in the first place.

If an individual is just an idiot though, and randomly pressing buttons and signing documents, and flailing cash around - well, I guess they deserve to lose the lot :evilburn:

... oh, and if an individual signs a risk declaration statement for Warrant Trading without even reading it; once again - their idiocy warrants (pardon the pun) their losses.
 
Nyden said:
I'm unfamiliar with these sorts of warrants - but if they are warrants, then a newbie shouldn't even be able to buy them. I know CommSec doesn't allow warrant trading without reading a form, signing it and sending it away. Same with Options, Margin Lending, etc. So, a basic brokerage account would never allow the individual to purchase these things in the first place.

If an individual is just an idiot though, and randomly pressing buttons and signing documents, and flailing cash around - well, I guess they deserve to lose the lot :evilburn:

... oh, and if an individual signs a risk declaration statement for Warrant Trading without even reading it; once again - their idiocy warrants (pardon the pun) their losses.
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I understand your point and generally I agree that caveat emptor is an important concept, but there are a few things that make this situation very different to those other products imo.

Firstly - these are not those sort of warrants, they're some sort of partly paid up security. They can be purchased without filling in any warrant forms as I understand it.

Secondly any other instrument that can incur a liability greater than the initial outlay not only requires signing of forms and passing tests on knowledge but also requires a margin to be lodged. A futures trade or a written options position will deduct the margin from the purchasers account.

Thirdly with products that can incur a loss greater than the initial outlay brokers put overall limits on the position size.

In this situation somebody can outlay $30,000 without signing a single form (not even a warrant or option form) and incur a $60 million dollar liability.

Someone can outlay $500 today because they think there's a pretty candlestick pattern. They are not explicitly informed at any time that they have taken on a liability and they have not had to sign a single form. Yet if they still hold the stock at the time the installment is due they are liable for half a million dollars and can be pursued through the courts for it.

I mean why bother with all of the other regulation on options, warrants, futures etc. if this sort of instrument can be offered to retail investors in this form - it doesn't make sense.
 
Small technicality question... are these Installment Receipts (which I think is what they are called) or Installment Warrants? I personally have no idea what, if any, differences there are between the two. However, that might be the reason why noobs are able to purchase them.

Going through the order book for BCSCA, there may be a few more Mrs He in there... there is just such a large number of bids for 1 to 10 millions of these things, costing a mere $1 to 10Ks. Hardly signs of institutional dealing.

nomore4s said:
Cuttlefish, while I understand where you are coming from & there should be some sort of check before being able to buy these, surely there has to be some responsibility on the part of the buyers to understand what they are buying.
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Junior said:
I agree with Cuttlefish, you should definately have to sign something before becoming a shareholder in this type of security. This sort of thing could happen to any day trader.
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I agree with nomore4s - "I am a day trader and trade regularly without the faintest idea of what a company does or what type of security it is" is not an excuse at all.
 
Sheesh guys, this was covered in the other thread.

This ISN'T a warrant. It is NOT a derivative. It is a partly paid STAPLED security. Instead of floating the company at $3.00 the decision was made to float at $1.00 and staple the remaining capital raising in 2 $1.00 INSTALMENTS at a later date. Companies do it all the time. TLSCA's anyone. It's basically a selling mechanism to get the deal away. The stapling is the company saying we will raise additional capital at such and such a time. With this structure there is no flexibility to vary that time which is what caused the stock to hit the fecal windmill.

Yes anyone investing in the stock right now and holding until the record date will be required to pay the next installment.

Eyes open guys...If you don't want to pay the next installment...don't buy it.

Sir O
 
Sir Osisofliver said:
Sheesh guys, this was covered in the other thread.

This ISN'T a warrant. It is NOT a derivative. It is a partly paid STAPLED security. Instead of floating the company at $3.00 the decision was made to float at $1.00 and staple the remaining capital raising in 2 $1.00 INSTALMENTS at a later date. Companies do it all the time. TLSCA's anyone. It's basically a selling mechanism to get the deal away. The stapling is the company saying we will raise additional capital at such and such a time. With this structure there is no flexibility to vary that time which is what caused the stock to hit the fecal windmill.

Yes anyone investing in the stock right now and holding until the record date will be required to pay the next installment.

Eyes open guys...If you don't want to pay the next installment...don't buy it.

Sir O
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The point still stands though - why do retail investors have to jump through a million hoops to be able to trade other "high risk" instruments but can get themselves into multi million dollars worth of hot water without even having to lodge a margin?

My incorrect understanding with these sorts of products was that the payment was always optional (more like a warrant or an option) and the only downside was the forfeiture of the security. I suspect that is the understanding that most retail investors would have had.

If I were an investment bank I'd probably do a credit check before giving someone what effecitvely amounts to a $60 million dollar loan. But heck I'm not as smart as those geniuses ... :rolleyes:
 
Agree with Sir O - and don't buy something you don't understand. Or, if you own them - you should be able sell them on the ASX before the next instalment is due. According to the following link (found with a google search) that looks to be 29th April, 2009. At the time of typing, there are 133,898,937 bid on BCSCA. http://www.brisconnections.com.au/Investors/FAQs/tabid/162/Default.aspx

Rolling Instalment warrants behave in a similar manner. The warrant issuers usually allow one to sell on the ASX for at least $0.001 which technically relieves the obligation to pay the next instalment. eg. HVNIMF - it is a $3.50 RIW and currently has 20,000 bid at $.001. By selling, it closes the position and normally relieves from any further obligations. However, it always pays to read the warrant PDFs as they appear to write their own rules and conditions can be different. It's a case of buyer beware...
 
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