Warrants and convertibles are hybrid securities that combine features of equity and debt. For retail investors on the Singapore Exchange (SGX), these instruments offer alternative ways to gain exposure to a company’s stock, often with leverage or downside protection. However, the terms and conditions can be complex, and the risks differ significantly from ordinary shares. This article explains the mechanics, key terminology, and practical considerations for investors evaluating warrants and convertible bonds listed or traded in Singapore.

What Are Warrants?

A warrant is a financial instrument that gives the holder the right, but not the obligation, to buy (or sell) a specified number of shares of the underlying company at a predetermined price (the exercise or strike price) on or before a specified expiration date. Warrants are issued by the company itself, unlike options which are traded between third parties. In Singapore, warrants are typically listed on SGX and trade separately from the underlying shares.

Key Features of Warrants

  • Issuer: The company that issues the warrant is the same entity whose shares are underlying. This distinguishes warrants from exchange-traded options or covered warrants issued by banks.
  • Exercise Price: The fixed price at which the warrant holder can buy the underlying share. For example, if a warrant has an exercise price of SGD 1.50 and the share trades at SGD 2.00, the warrant is “in-the-money”.
  • Expiration Date: Warrants have a finite life, often ranging from one to five years. After expiry, the warrant becomes worthless.
  • Gearing (Leverage): Because warrants trade at a fraction of the share price, small movements in the underlying share can lead to larger percentage changes in the warrant price.
  • Dilution: When warrants are exercised, the company issues new shares, increasing the total number of shares outstanding. This dilutes existing shareholders’ ownership.

Types of Warrants on SGX

Most warrants on SGX are call warrants, giving the right to buy shares. Some are put warrants, giving the right to sell. The SGX also lists structured warrants issued by financial institutions, which are not company-issued but behave similarly. For retail investors, the most common are company-issued warrants attached to rights issues or placements. For example, in 2020, Singapore-listed developer UOL Group Limited issued warrants as part of a renounceable rights issue, giving shareholders the right to subscribe for new shares with attached warrants.

Understanding Convertible Bonds (CBs)

A convertible bond is a corporate bond that can be converted into a predetermined number of the issuer’s shares at the bondholder’s option. It combines fixed-income features (regular coupon payments and principal repayment at maturity) with the upside potential of equity conversion. In Singapore, convertible bonds are often issued by companies seeking lower-cost financing, as the conversion feature allows them to offer a lower coupon rate than a straight bond.

Key Terms in Convertible Bonds

  • Conversion Ratio: The number of shares each bond can be converted into. For instance, a SGD 100,000 bond with a conversion ratio of 50,000 means each bond converts into 50,000 shares.
  • Conversion Price: Effectively the price per share at which conversion occurs. It equals the bond’s face value divided by the conversion ratio. If the bond’s face value is SGD 100,000 and the conversion ratio is 50,000, the conversion price is SGD 2.00 per share.
  • Coupon Rate: The interest paid on the bond, typically lower than a comparable straight bond because of the conversion option.
  • Maturity Date: The date on which the bond must be redeemed if not converted. Some CBs are callable by the issuer, meaning the company can force conversion or redemption before maturity.
  • Parity: The market value of the shares that the bond can be converted into. If the share price is above the conversion price, the bond trades above its face value (trading “above parity”).

Why Companies Issue Convertibles

Companies in Singapore often issue convertible bonds to raise capital without immediately diluting existing shareholders. For example, in 2021, Keppel Corporation Limited issued SGD 500 million in perpetual convertible bonds to fund its transition into a green energy and urban solutions provider. The bond carried a coupon of 3.0% per annum, significantly lower than what a straight bond would have required. The conversion price was set at a premium to the prevailing share price, giving Keppel the benefit of potential equity conversion if its share price rose.

Warrants vs. Convertibles: Key Differences

While both instruments offer the right to acquire shares, they differ in structure and risk profile. The table below summarises the main distinctions:

  • Cash Flow: Warrants require an upfront payment (the warrant price) but no ongoing interest. Convertibles pay regular coupons and return principal at maturity if not converted.
  • Dilution Timing: Warrants cause dilution only when exercised, typically near expiry. Convertibles cause dilution when converted, which may happen gradually or at maturity.
  • Downside Protection: Convertibles have a bond floor, the bond’s value as a fixed-income instrument provides a minimum value if the share price falls. Warrants have no such protection and can expire worthless.
  • Leverage: Warrants offer higher gearing because of their lower price. Convertibles offer less leverage but more capital preservation.
  • Income: Convertibles pay interest; warrants do not.

How to Read SGX Announcements on Warrants and Convertibles

When a Singapore-listed company issues warrants or convertible bonds, it must file price-sensitive announcements with SGX. These filings contain critical information for investors. Key documents include the offer information statement (for warrants) or the bond prospectus (for CBs). Retail investors should pay attention to the following sections:

  • Terms and Conditions: This includes the exercise price, conversion ratio, expiration date, and any adjustment clauses (e.g., for stock splits or dividends).
  • Use of Proceeds: The company must state how it will use the funds raised. For example, working capital, debt repayment, or acquisition funding.
  • Dilution Impact: The announcement should disclose the maximum number of new shares that could be issued if all warrants or convertibles are exercised or converted.
  • Redemption or Call Provisions: For convertibles, the issuer may have the right to redeem the bonds early or force conversion if the share price exceeds a certain level.

Investors should also monitor the SGX announcement timeline to ensure they do not miss key dates such as the record date for rights entitlements or the conversion period.

Risks to Consider

Warrants and convertibles carry distinct risks that are often underestimated by retail investors.

Warrant-Specific Risks

  • Time Decay: As expiration approaches, the warrant’s time value erodes. Even if the underlying share price stays flat, the warrant price can fall sharply.
  • Liquidity Risk: Many warrants on SGX have low trading volumes, leading to wide bid-ask spreads and difficulty exiting positions.
  • Dilution Risk: If a large number of warrants are exercised, the resulting increase in shares outstanding can depress the share price.

Convertible-Specific Risks

  • Credit Risk: If the issuer defaults, bondholders may lose part or all of their investment. Retail investors should check the company’s credit rating, if available.
  • Conversion Premium Risk: If the share price remains below the conversion price, the bond will trade like a straight bond, and investors may not benefit from equity upside.
  • Call Risk: If the issuer calls the bonds early, investors may be forced to convert or redeem at an unfavourable time.

General Risks

  • Misunderstanding Terms: Complex adjustment clauses (e.g., anti-dilution provisions) can alter the economics unexpectedly.
  • Market Risk: Both instruments are sensitive to the underlying share price, interest rates, and market sentiment.

Practical Tips for Singapore Retail Investors

Before investing in warrants or convertibles, consider the following steps:

  1. Read the Announcement Carefully: Start with the price-sensitive announcement filed with SGX. Look for the full terms and conditions, not just the headline.
  2. Calculate the Effective Cost: For warrants, compare the total cost of buying the warrant and exercising it versus buying the share directly. For convertibles, compare the yield to maturity with that of a straight bond from the same issuer.
  3. Assess Dilution: Use the number of potential new shares from the announcement to estimate the diluted earnings per share. Check the company’s income statement and balance sheet in its latest annual report to gauge the impact.
  4. Monitor Corporate Actions: Warrants and convertibles are often affected by corporate actions such as dividends, rights issues, or share buybacks. The company must adjust the exercise price or conversion ratio accordingly.
  5. Know Your Exit Strategy: Warrants have a fixed life. If the share price does not rise above the exercise price before expiry, the warrant will expire worthless. Plan your exit based on the warrant’s time value and your outlook for the stock.

Real-World Examples on SGX

To illustrate, consider the case of Singapore Technologies Engineering Ltd (ST Engineering). In 2022, the company issued SGD 500 million in convertible bonds due 2027, with a coupon of 1.75% per annum and a conversion price of SGD 3.80. At the time, the share price was around SGD 3.40, meaning the bond traded at a premium to its conversion value. Investors who bought the bond received a modest coupon while waiting for the share price to exceed SGD 3.80 to benefit from conversion. If the share price remained below SGD 3.80, the bond would still return principal at maturity, providing downside protection.

Another example involves ThaiBev PLC, which issued warrants in 2019 as part of a rights issue. Each rights share came with one warrant, exercisable at SGD 0.50 over three years. The warrants traded on SGX separately, allowing investors who did not want to hold the shares to sell the warrants. For those who exercised, they obtained shares at a discount to the prevailing market price, but the subsequent dilution weighed on the stock.

Tax Considerations in Singapore

For individual investors, gains from the sale of warrants or convertibles are generally not subject to capital gains tax in Singapore, as there is no capital gains tax. However, if you are a trader or the transactions are deemed to be income in nature, you may be liable for income tax. Coupon payments from convertible bonds are considered interest income and are taxable if the bond is held as an investment. Dividend payments from shares received upon conversion are treated as normal dividends. Always consult a tax professional for your specific situation.

Conclusion

Warrants and convertibles offer Singapore retail investors flexible ways to participate in equity markets, but they require careful analysis of terms, risks, and market conditions. By reading SGX announcements thoroughly, understanding dilution mechanics, and assessing the credit quality of the issuer, investors can make informed decisions. These instruments are not suitable for everyone, but for those willing to study the details, they can be valuable additions to a diversified portfolio.

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