The management of 2nd Chance Properties announced a proposed bonus issue of free warrants on the basis of One bonus Warrant for every One existing ordinary share to the shareholders.
The size of the bonus warrants issued is as much as the paid-up share capital of the company, which is currently at 755,396,152. The enlarged capital would immediately be double of that size should all the proposed warrants is exercised.
The exercise price of the warrants is specified at $0.25, which is not far away from the current market share price of around $0.23.
I wrote a few articles on 2nd Chance previously (Link Here) and warned on their method of financial engineering.
This proposed warrants is a “replacement” of the current existing warrants at $0.40 which is expected to expiry on 24th Jul 2017.
To me, it looks like the goal of the management is to do this:
Borrow money -> Issue high dividends -> Push up share price -> Issue Warrants -> Enlarged share base -> Conversion money used to repay borrowings.
The management seemed confident that the conversion at the exercise price will take place so they went ahead to increase their gearing meanwhile.
Not sure to me but it seems that the management is sort of putting a cap on the existing share price to $0.25 on the enlarged share base. If I am buying the company after the warrants proposed issuance at a price higher than $0.25, I’d see a wave of enlarged share base of capital coming in which dilutes my holdings as a new shareholder. If I am an existing shareholder looking to hold this for a long term, I better make sure that I am entitled to this bonus warrants so I could hold the wild key of potentially not being diluted since it remains the same for existing shareholders.
Always a good case study on financial engineering.