Bonus Rights

Short Description

Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change. Note that this is a multi-stage event.

A Bonus Rights Issue, which is sometimes referred to as “Bonus Rights” is effectively an alternative way to process a Stock Dividend. In a Bonus Rights Issue, the company issues “rights entitlements” to existing shareholders. These “rights entitlements will be listed for a limited amount of time on the stock exchange, allowing shareholders in need of liquidity to sell their rights. After a while when trading has stopped, all rights will be mandatorily assimilated into the newly issued shares often with a ratio applied. This assimilation will happen automatically for shareholders. Shareholders who have an amount of “entitlement rights” that are not divisible by the ratio, can sell off the redundant “entitlement rights” during the trading period and sometimes there is a facility in the market to cash-compensate for fractional rounding.

    • Equities
    • Rights Entitlement Line
    • Issuer
      • The issuer issues the rights entitlements and distributes them to shareholders proportional to their holdings (for example 1 Rights Entitlement for every 10 shares held). 
      • A second event type (Mandatory Conversion) will be created to assimilate the Rights Entitlements into the newly created shares.
    • Agent Bank
      • The Agent Bank will announce the event and makes sure that the Rights Entitlements Line is created in the system of the CSD and Numbering Agencies (ANNA for example). On the Paydate of the Bonus Event, the Paying Agent will credit the Rights Entitlements to the Issuer Account at the CSD (if the Issuer has one) and triggers the payment of these rights downstream.
      • Often, the Agent Bank will facilitate Over the Counter Trading of the Rights Entitlements, but the rights themselves can also be (temporarily) listed on the exchange themselves.
      • Once the Bonus Rights have been credited, the Agent Bank can create the second event (which is likely to be a Mandatory Conversion) to convert the Rights entitlements into the original shares.
    • Security Identification Provider (Numbering Agencies)
      • Numbering Agencies need to create a new line of stock that will expire once it assimilates into the original shares.
    • Exchange
      • If the Rights Entitlements are tradable and listed on an Exchange, then the Exchange needs to ensure that the temporary security is available in their systems and that market parties are able to trade them.
    • Index
      • It’s unlikely that there will be a lot of work resulting from the Event. If the Company is included in an Index then this will stay the same.
    • Issuer CSD
      • At CSD level, Messaging is generated and sent down the chain. Rights Entitlements need to be credited onto the accounts of the participants. Stock Claims need to be processed for cum-trades that are settling over the Record Date
      • Rights Trading needs to be facilitated
      • Mandatory Conversion to be processed and corresponding messaging initiated and sent down the chain. Trades that remain pending on the Rights Entitlement Line need to be cancelled and reinstated on the original line (Transformations).
    • Global / Direct Custodian / Investor CSD
      • At Custodian level Messaging is received and processed and subsequent messaging is generated and sent down the chain. Rights Entitlements need to be credited onto the accounts of the clients. Stock Claims need to be processed for cum-trades that are settling over the Record Date (Claims Processing)
      • Rights Trading needs to be facilitated
      • Mandatory Conversion to be processed and corresponding messaging initiated and sent down the chain. Trades that remain pending on the Rights Entitlement Line need to be cancelled and reinstated on the original line (Transformations).
    • Broker Dealer
      • At Broker level Messaging is received and processed and subsequent messaging is generated and sent down the chain. Rights Entitlements need to be credited onto the accounts of the clients. Stock Claims need to be processed for cum-trades that are settling over the Record Date (Claims Processing)
      • Rights Trading needs to be facilitated
      • Mandatory Conversion to be processed and corresponding messaging initiated and sent down the chain. Trades that remain pending on the Rights Entitlement Line need to be cancelled and reinstated on the original line (Transformations).
    • Stock Lending Broker / Collateral Agent
      • If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to interpret what the event means for them and what action they want to take as a result of it. Stock may have to be recalled before the important dates of the event.
    • Fund Manager
      • Fund Manager needs to make a decision on what is best for the fund; keep the Rights Entitlements and have them converted into shares or sell the Rights Entitlements and receive Cash.
    • Data Vendors and Rating Agencies
        • Vendors will have to update their systems with the correct information for the securities and send messaging to their clients about it.
    • Retail Bank
      • At Retail Bank level the messaging is received and ingested and needs to be forwarded to the Beneficial Owners.
      • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)
    • Beneficial Owner
        • Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable). They will need to make a decision on whether they want to keep the Rights Entitlements and have them converted into shares, or sell the rights and receive Cash. It’s likely that at Retail Level trading is not offered because trading fees are high when compared to the total cash consideration that can be expected from selling the Rights Entitlements.
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    • Geographical Differences
      • There are not many countries where this Event Type is used and it is an Event that only becomes fashionable in times of Liquidity problems (for example the Financial Crisis of 2008). It is a rare Event Type.
    • Reasons why a Company initiate a Bonus Rights Issue
      • A company calls a Bonus Rights Issue if it is in liquidity problems. By paying stock to existing shareholders they don’t need cash. However, to provide shareholders with a chance to receive cash (by selling their rights), the company provides an alternative. A second reason why a company might opt for this scenario is when there is doubt about the value of the newly issued shares
  • Swift does not designate the Bonus Rights Event as a separate Event Type. Typically a BONU Event (22F CAEV = BONU) will have to be used whereby the CAOP = SECU is a different security than the original security. (In a straightforward Bonus Issue, the distributed stock is the same as the original security).
  • For the second stage of the Event a Mandatory Conversion (CONV MAND) or Assimilation (PARI MAND) can be used.
    • SMPG does not make mention of the Bonus Rights Event in their CA Event Template Grid.
    • For the second stage of the Event a Mandatory Conversion (CONV MAND) or Assimilation (PARI MAND) can be used.

The Company will announce the Event which will require shareholder approval at the AGM/EGM. Rights Entitlements are credited to shareholders in proportion to their share in the company and trading in the Rights Entitlements can start. Once the end of the Trading Period is reached, the Rights Entitlements will be converted into the orginal shares (which the company could have held in it’s own accounts).

    • Announcement Date (Bonus Event)
    • Ex Date (Bonus Event)
    • Record Date (Bonus Event)
    • Paydate (of the Rights Entitlements) (Bonus Event)
    • Start of Trading Period
    • End of Trading Period
    • Record Date (Conversion Event)
    • Paydate (Conversion Event)
    • MT564 Bonus
    • MT566 Bonus
    • MT54X
    • MT564 Mandatory Conversion
    • MT566 Mandatory Conversion
    • MT54X
    • Seev.031 Bonus
    • Seev.035 Bonus
    • Seev.036 Bonus
    • Sese.025
    • Seev.031 Mandatory Conversion
    • Seev.035 Mandatory Conversion
    • Seev.036 Mandatory Conversion
    • Sese.025

Example of a Bonus Rights (source investigate.co.uk):

Board of Directors of UBS AG determines exchange ratio for stock dividend

Zurich/Basel, 16 April 2008 – The Board of Directors of UBS AG has determined anexchange ratio of 20:1 for the stock dividend. Every registered share of UBS AG will be allocated one tradable entitlement. Twenty entitlements will enable the holder to acquire one new registered share of UBS AG for free.

Based on the decision made by the Extraordinary General Meeting on 27 February 2008 to create authorized capital for the distribution of a stock dividend, the Board of Directors of UBS AG has determined the exchange ratio for the stock dividend at 20:1. Every registered share of UBS AG with a nominal value of CHF 0.10 will be allocated one tradable entitlement. Twenty entitlements give theholder the right to receive one new share of UBS AG with a nominal value of CHF0.10 for free.

Every shareholder holding shares of UBS AG on 25 April 2008 after close of business will receive one tradable entitlement for each share held. The entitlements are expected to be traded on SWX Europe from 28 April 2008 up to and including 9 May 2008. Entitlements held after the entitlement trading period will be automatically exchanged into new shares on or around 15 May 2008 at the ratio of 20:1. The first trading day of the new shares created as a result of the stock dividend is expected to be 19 May 2008.

As can be seen from the graph below, this event happened at a stressful time for UBS.

With the knowledge of hindsight it probably would have been better to sell the rights entitlements (even considering dividends) and invest the cash proceeds elsewhere…

UBS Share Price and Bonus Rights Event
    • Stock Claims will have to be processed on the BONUS event
    • Depending on when trading stopped, transformation may have been processed on the Mandatory Conversion Event.

There is no mention of Fractions Handling in the notice above.

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