Bonds with Warrants: Separate the Debt from the Right to Buy Shares
Bond repayment and warrant exercise create different cash flows. Understand a BW by connecting warrant detachability, exercise price, payment method, and remaining unexercised rights.
A bond with warrants, or BW, combines a bond with a right to subscribe for new shares on specified terms. Do not assume the bond must be replaced by shares as with a convertible bond; track warrant exercise and bond repayment separately.
Map the bond and the warrant as two contracts
First record the bond's coupon rate, maturity redemption amount, and early redemption terms, then separately record the warrant's exercise price, exercise ratio, and exercise period. If warrants are detachable, they may trade separately from the bond and have different holders. Actual public BW disclosures specify whether warrants are detachable and how payment for new shares is made. Buying the bond therefore does not establish that the investor still holds its warrants. Start the analysis by checking the exact name and security code of the instrument held.
Check what money reaches the company when warrants are exercised
With cash settlement of the exercise price, the warrant holder makes an additional payment and receives new shares. In this case, record both the proceeds from the new share issue and the continued existence of the original bond debt. If the contract permits the bond to be tendered in lieu of payment, the effects on company cash and debt can differ. Follow the disclosed payment terms rather than calculating all BWs in the same way. If an exercise price adjustment changes the exercise ratio, do not assume that one warrant unit always represents one share.
The trap in an apparently cheap warrant price
Comparing only the warrant price with the share price omits part of the actual acquisition cost. A valid comparison requires adding the exercise payment to the warrant purchase price and reflecting the exercise ratio and costs. The right may become unusable after the exercise period ends. Low trading liquidity or a delay between exercise and receipt of shares also means there is no guarantee of selling at the expected price. When analyzing the issuer, show the repayment burden on outstanding bonds separately from the potential dilution of unexercised warrants to reduce double-counting and omissions. A warrant holder may differ from the person entitled to bond interest, so calculate profit and loss separately for each security. If a bond remains in the account after warrant exercise, its price and maturity risk still require a separate assessment.
Worked example
Hypothetical example: If one warrant buys one share, the warrant costs KRW 700, and the exercise price is KRW 4,000, the simple cost of obtaining one share is KRW 4,700. This assumes an unchanged exercise ratio and excludes fees and other costs. If all 1 million warrants are exercised for cash, the company receives KRW 4 billion and issues 1 million new shares. This alone does not mean the principal of the existing BW bonds has also been repaid.
What to check
- Check whether the bond and warrants are detachable.
- Check the current exercise price and exercise ratio per warrant.
- Distinguish cash payment from tendering bonds in lieu of payment.
- Add the warrant purchase cost to the exercise payment.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.