With 4.3 million warrants outstanding, management at Canadian Western Bank was always left wondering when warrantholders would exercise their right to buy new shares. The resulting uncertainty made capital budgeting a nightmare.
To end the guessing game, CWB has announced a new proposal to buy back the warrants. At a redemption price of $17.21, the premium the warrantholders would earn is $1.21 per warrant, or 7.6 per cent.
That may not seem like too much, but CWB hopes that cash on the table is a big win for some of the warrantholders who have wanted to sell but couldn’t because the market for the warrants is so illiquid. Flatiron Capital Management owns 52 per cent of the outstanding warrants and its position didn’t trade.
To get Flatiron on board with the deal, CWB negotiated the premium paid with the buyside account. Flatiron also has the right to subscribe to more 2.3 million shares through a private placement priced at $30.46 per share.
And if there are some accounts who don’t want to sell, they can still exercise the warrants and buy common shares at a price of $14 per share, less than half of where CWB shares are now trading.
The warrants were first issued when CWB sold $210-million of preferred units at the depths of the recession in February 2009. Because CWB was unrated at the time, the bank offered up 1.78 common share purchase warrants per preferred unit purchase to convince accounts to buy.
CWB has since obtained a debt rating of single-A (low) from DBRS Ltd. and used it to raise $300-million of subordinated notes last November
15 million warrants were initially issued, but in the two years since, over 10 million of them have already been bought back or exercised, CWB said.
The post has been updated. An earlier version noted that the preferred unit offering totalled $65-million. That amount was only a private placement portion of the total $210-million financing.