Tuesday, March 10, 2009

HSBC Rights Issue

I hope this is useful reference for most who want to do some trades with their HSBC shares and rights during the rights period. If you decide to act now however, I have no advice for you. All I can say is the current HSBC share price is the subject of much speculation and arbitrage, and hence is a bad time for trade (for layman) as the market quote is highly distorted. Things should become clearer once the stock has gone ex-right and more so when the rights start trading on their own.

By now most should be familiar with what a rights issue entails so I'll skip to the core analysis.

(HSBC share price, ex-right price, price of each rights)

P P(ex) Rights*
46 40.7 12.7
45 40.0 12.0
44 39.3 11.3
43 38.6 10.6
42 37.9 9.9
41 37.2 9.2
40 36.5 8.5
39 35.8 7.8
38 35.1 7.1
37 34.4 6.4
36 33.6 5.6
35 32.9 4.9
34 32.2 4.2
33 31.5 3.5
32 30.8 2.8
31 30.1 2.1
30 29.4 1.4
29 28.7 0.7
28 28.0 0.0

* [P - P(ex)] x 12/5 or P(ex) - $28

For example, yesterday HSBC closed in HK at $33, so the theoretical ex-right share price of HSBC should be $31.5 (it's lower than market price because there's dilution from the rights shares issued at $28) and the implied market price of each right (to buy one share) is $3.5.

Note these calculation are only relevant BEFORE before the share goes ex-right after trading this Thursday, after which the rights price (theoretical and not traded until March 20) will simply be the difference between the then HSBC share price and $28.

Between this Friday and the following Friday, Mar 20, only the ex-right HSBC shares will be traded but not the rights. It may be interesting to compare the actual ex-right prices to the theoretical ones over the past week (it's roughly 0.9 of the share price if it's not adjusted automatically by your stock quote provider) but I don't know how one can profit from this, if at all, reliably.

Comes the following Friday, i.e. Mar 20, when the rights start trading, 3 possible scenarios can happen but you only need to pay attention to one.

(1) The share price trades more expensive than the rights price indicates, e.g. share price is $35 yet the rights trades less than $7, which means it'd be cheaper to buy the rights and then subscribe to the share than buying the ex-right share outright in the market. You need not worry about this scenario because I'm sure arbitrageurs would come out and equalize this difference in no time, by shorting HSBC shares and buying the rights. So there's nothing you can do to profit from this scenario as a layman.

(2) The share price trades on par with the rights price, i.e. rights price = difference between share price and $28. Again, nothing you can do as a layman. You many choose to participate in rights or buy new HSBC shares as you wish, or not.

(3) The share price trades cheaper than the rights price indicates, e.g. share price is $35 yet the rights trades more than $7, or in the extreme case where share price is below $28, yet the rights trades above zero value. If this happens and stays for a while, a few hours maybe, then there's something we layman can do about. I don't really know why it may happen but there's no need to understand fully either.

If you hold HSBC shares and have decided to participate the rights issue, DON'T! Instead sell your rights and buy the same number of shares (as you would via subscribing to the rights) in the open market. Rarely will you have the chance to do exactly what an arbitrageur would do, selling high and buying low of the same asset.

If you want to speculate and make a quick buck, buy some HSBC shares, as the higher-than-usual demand for the HSBC rights will soon translate into higher demand for the shares as well. But how the share will perform after this difference has been equalized is anybody's guess.

In summary, do nothing new if (1) or (2) happens, buy some HSBC shares in (3).

DISCLOSURE: I have no HSBC at time of writing.


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Nice information, many thanks to the author. It is incomprehensible to me now, but in general, the usefulness and significance is overwhelming. Thanks again and good luck!
Hey thanks for sharing this. It's been a great help. Keep writing.
Great stuff!
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