Put Warrants via Private Placement; Call Warrants via Market Making

Written by Alan Voon

Under the revised warrants issuance guideline, issuers can expedite the listing of structured warrants by opting for market making.  This way, there will be no private placement and issuers will hold 100% of the warrants on the first day of listing.  This is praticed by most issuers in developed market as more sophisticated investors and traders will never want to have their money locked up for about one week as is the norm under the private placement practice.  Since the new guideline came into effect, some issuers have chosen the market making route to listing their warrants although it is quite likely that issuers can sell more warrants via private placements and make more money.  A recent issue by OSK Investment Bank attracts interest due to the fact that it chose to place out the put warrants but not the call warrants.  Why is that so?




The following is a statement from OSK188 website :

New Call Warrants by OSK:

OSK is offering 2 new put warrants ("PWs") on  Hang Seng Index (HSI-H1: RM0.15) and FTSE Bursa Malaysia KLCI Index (FBMKLCI-HA: RM0.165) and 2 new call warrants ("CWs") on  IOI Corporation Berhad (IOICORP-CL: RM0.16) and Malayan Banking Berhad (MAYBANK-CK: RM0.16) today 18 August 2009. Tentatively listing date will be on 25 August 2009.

The 2 new PWs are opened for subscription application and the 2 new CWs are by way of market making i.e. no initial placement will be made. Investors who are interested can purchase the 2 new CWs in the secondary market after listing.

Is it a bit strange that an issuer is offering call and put warrants via different mechanism?

We should know by now that warrants that are offered via private placement tend to be more expensive as issuers need to cover commission paid to placement agents and other associated fees.  Issuers are also likely to sell more warrants via private placement because listing direct via market making until now does not attract much interest due to the wide bid-ask spread.

In all likelihood, issuers cannot place out much call warrants due to poor experience by most investors in the past and also due to the current seemingly high valuation of stocks after a strong run in the past few months.  They may thus see an opportunity to make some money placing out the "supply-tight" short products here.  As a comparison, the FBMKLCI-HA was offered at 16.5 sen with an exercise ratio of 1,500.  The implied volatility of this put warrant at offer price is about 44%. On the other hand, put warrants of US-listed iShares MSCI Malaysia ETF (EWM) trade at implied volatilities of less than 30%.

Although EWM is a different product than FBMKLCI, the corelation between these two products should be quite close and thus their volatilities would be somewhat similar.  If you are a trader and assuming the market maker is there to provide the bid and ask prices, you should know which product is the preferren one!