Friday, May 26, 2017

Investing in ICULS (loan stock) in Bursa Malaysia

When a public listed company wanted to raise fund from shareholders and/or investors, it can either do it by issuing new equities (rights issue, private placement) or by issuing new loans (ICULS, bond).

Normally, to encourage subscription, free warrants are attached together during issuance, which will be detached and traded individually in the share market upon listing.

ICULS (Irredeemable Convertible Unsecured Loan Stock) is a kind of loan stock with the following 3 features:

  • Irredeemable: you cannot redeem it for cash.
  • Convertible: you can convert it into ordinary share at any time before its expiry, using the predetermined conversion method(s).
  • Unsecured: it is not supported by any collateral. In the event of bankruptcy, there is no guarantee that you can get back any money from your loan stock holding.
On top of that, ICULS has the following entities in common:
  • Expiry: similar to warrants, the ICULS will be burnt and of no value after its expiry date, if not converted into ordinary share. There may be a mandatory forced conversion upon expiry.
  • Coupon rate: a predetermined fixed coupon interest rate, payable periodically at least once per year to its holder.
  • Conversion method(s): traditional ICULS comes with a conversion ratio for its conversion to ordinary share. For example, a 2:1 conversion ratio means you need to use 2 ICULS to get 1 ordinary share. Nowadays, certain ICULS also provides a second option for holder to convert 1 ICULS into 1 ordinary share, by paying a predetermined conversion price (similar way with warrants).
  • Premium/Discount: similar to warrants, the ICULS is trading with a price. When the ICULS conversion cost higher than its mother share price, it is said to have a premium. Otherwise, it is at a discount. If an ICULS has more than 1 conversion methods, each method will have individual premium/discount.
ICULS can give you the benefits of a bond that pays interest, until it is converted into equity.

For example, PUC-LA (0007LA) is a 3-years ICULS listed in Bursa Malaysia within the period of 2016-2019. Click here to read its profile for important information about this ICULS.

It has a nominal value of RM0.05 and a coupon rate of 4% per annum, payable on annual basis in arrears. This means if you have PUC-LA, you will get an interest payment of RM0.05 x 4% = RM0.002 per ICULS per year. If you have 1 million PUC-LA, you will get RM2,000 per annum as the interest payment.

Its maturity date is on 15 February 2019, which is 630 days from today (26 May 2017).

Its conversion price is RM0.10, which can be exercised using either one of these 2 options:
  • By using 2 ICULS (nominal value at RM0.05 each) to convert into 1 ordinary share.
  • By using 1 ICULS (nominal value at RM0.05) and top up RM0.05 cash to convert into 1 ordinary share.

Upon expiry, any remaining ICULS not converted will be mandatorily converted into new PUC shares at the conversion price (RM0.05).

Today, PUC share price closed at RM0.155 and PUC-LA closed at RM0.100.

For Option 1 (2 ICULS for 1 mother share):

RM0.100 x 2 = RM0.200.

Since mother share is only at RM0.155, it has a conversion premium of RM0.200 - RM0.155 = RM0.045.

Premium at percentage = 0.045/0.155 = 29.03%

For Option 2 (1 ICULS + RM0.05 for 1 mother share):

RM0.100 + RM0.05 = RM0.15

Since mother share has higher price at RM0.155, it has a conversion discount of RM0.155 - RM0.15 = RM0.005

Discount at percentage = 0.005/0.155 = 3.23%

If you want to convert now, definitely you will choose Option 2 for conversion.

If a stock has an ICULS and also a warrant at the same premium/discount rate, ICULS will be a better option because:
  • Warrant won't get any interest nor dividend, while ICULS will get interest despite not getting any dividend.
  • There is only one way to convert warrant to mother share, which is by paying the conversion price. For ICULS, there can be flexibly more than one ways.
  • Warrant will definitely be burnt upon expiry if not converted. Certain ICULS such as PUC-LA will not be burnt as there is a forced conversion mechanism upon expiry.
So, in what situation you can consider buying an ICULS?
  • When the ICULS is in the money (has zero premium or at discount), and mother share price has the tendency to move up. You will be benefited with the gearing effect.
  • When mother share does not declare dividend. You will get coupon interest in ICULS.
  • If there is a premium, when the expiry date is not too near from now.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.


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