What is ICULS?
Iculs area quasi-debt as they typically pay an annual coupon over their tenure but the "irredeemable" feature means there will be no repayment of principal at maturity. Instead, the face value of the Iculs will be converted into new ordinary shares based on the stipulated conversion ratio.
In this sense, Iculs take on the characteristics of warrants as their value would fluctuate with the underlying shares, moving in similar direction.
If you were an Iculs holder, you would enjoy coupon income (interest) throughout the Iculs' life and be allotted new shares at expiry.
Take for example of XX-LB.
Issue date : 1997
Nominal value : RM1 as a five-year Iculs
Coupon : 7.5%
Conversion ratio : 8.4
If you subscribed to 1,000 XX-LB from the start, you would have received 7.5cent per unit in gross annual coupon for five years. Upon maturity, your 1,000 XX-LB would have been converted into 119 XX new ordinary shares. As long as the Iculs issuer remains solvent, an Iculs holder would collect annual coupon and be issued new shares upon maturity. Most cases would not involve additional outlay at maturity, although Iculs plus cash option is provided sometimes, which could enhance returns should the Iculs trade above RM1.
Even in the case of insolvency, Iculs holders' rights would rank on par with unsecured creditors but before shareholders. In this sense, Iculs hold value much better than warrants, which can be expired worthless.
Warrants
As against Iculs, the key difference is that a warrant holder would not enjoy any income stream during its life, and he would have to fork out additional outlay to exercise the warrants, which at the end of the day, is only an option which would be worthless if not exercised. Furthermore, in the case of insolvency, warrant holders would most likely be holding worthless paper as they have no rights unless they exercise the ownership option.
All else being equal, both Iculs and warrants lose value over time with the approach of their expiry.
It may not be meaningful to generalise as a warrant trading at conversion discount could be better investment than Iculs at excessive premium. However, given similar tenure and conversion premium, Iculs would tend to be less risky due to the coupon income and also the conversion of principal at maturity, against warrants which provide no income and require additional outlay at maturity.
What is interesting though is in the Malaysian context, investors' penchant for warrants is such that they area often chased up to huge premiums, while Iculs lag behind at conversion discounts, despite offering attractive annual coupons. This provides mispricing opportunities, which could bring potentially meaningful gains.
They are several key parameters should be checked out before any decision to invest in ICULS/warrants.
Iculs area quasi-debt as they typically pay an annual coupon over their tenure but the "irredeemable" feature means there will be no repayment of principal at maturity. Instead, the face value of the Iculs will be converted into new ordinary shares based on the stipulated conversion ratio.
In this sense, Iculs take on the characteristics of warrants as their value would fluctuate with the underlying shares, moving in similar direction.
If you were an Iculs holder, you would enjoy coupon income (interest) throughout the Iculs' life and be allotted new shares at expiry.
Take for example of XX-LB.
Issue date : 1997
Nominal value : RM1 as a five-year Iculs
Coupon : 7.5%
Conversion ratio : 8.4
If you subscribed to 1,000 XX-LB from the start, you would have received 7.5cent per unit in gross annual coupon for five years. Upon maturity, your 1,000 XX-LB would have been converted into 119 XX new ordinary shares. As long as the Iculs issuer remains solvent, an Iculs holder would collect annual coupon and be issued new shares upon maturity. Most cases would not involve additional outlay at maturity, although Iculs plus cash option is provided sometimes, which could enhance returns should the Iculs trade above RM1.
Even in the case of insolvency, Iculs holders' rights would rank on par with unsecured creditors but before shareholders. In this sense, Iculs hold value much better than warrants, which can be expired worthless.
Warrants
As against Iculs, the key difference is that a warrant holder would not enjoy any income stream during its life, and he would have to fork out additional outlay to exercise the warrants, which at the end of the day, is only an option which would be worthless if not exercised. Furthermore, in the case of insolvency, warrant holders would most likely be holding worthless paper as they have no rights unless they exercise the ownership option.
All else being equal, both Iculs and warrants lose value over time with the approach of their expiry.
It may not be meaningful to generalise as a warrant trading at conversion discount could be better investment than Iculs at excessive premium. However, given similar tenure and conversion premium, Iculs would tend to be less risky due to the coupon income and also the conversion of principal at maturity, against warrants which provide no income and require additional outlay at maturity.
What is interesting though is in the Malaysian context, investors' penchant for warrants is such that they area often chased up to huge premiums, while Iculs lag behind at conversion discounts, despite offering attractive annual coupons. This provides mispricing opportunities, which could bring potentially meaningful gains.
They are several key parameters should be checked out before any decision to invest in ICULS/warrants.
- Fundamentals of underlying shares - given that both Iculs and warrants ultimately derive their value form the underlying shares;
- Tenure - the longer the better, as warrants/Iculs lose value over time
- Conversion premium - the lower the better;
- Volatility - warrants of a more volatile shares tend to attract a higher premium;
- Coupon - in the case of Iculs, the coupon payment itself could be an attaction and an effective cushion.
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