Untying the Knots: Simplifying Corporate Actions

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, IHS Markit's Managed Corporate Action team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

Mini-Tenders: The rise of an unpopular event

To begin… what is a 'mini'-tender?

Many of us in the world of Corporate Actions have heard the phrases, "Beware the Mini-Tender!" or "What's the Offeror's name, again?" And rightfully so.

Through its transaction, a mini-tender offer is an unsolicited and widely disseminated offer made directly to issuers' shareholders to purchase a small percentage (under 5% of the total shares outstanding) of an issuer's securities at a rate below the current market price [1].

While the purchase percentage may vary depending on the marketplace, this 5% or less threshold is critical to the making of a mini-tender since any offer above this threshold would trigger a variety of regulatory requirements overseen by the Securities and Exchange Commission (SEC). Through this tactic, mini-tender offers are able to bypass disclosure and procedural protections of formal takeover bid regulations. This is why they are treated with suspicion and can be perceived as a method for carrying out a hostile takeover.

Whose gain is it anyway?

One of the mini-tender's most common traits is that the offer is launched below the security's market value. The offeror's goal is to obtain tendered shares, resell those shares in the open market, pay off the tendering shareholder and retain the difference as profit.

There are other cases in which a mini-tender offeror may "gamble" its way into a profit by adding a small premium to the market. These offers remain open for weeks or months, locking in the investors' tendered shares. Through this method, offerors are gambling on the assumption that the market price will eventually rise above the initial bid premium, which results in a profit for them but a loss for the investor, despite the investor initially believing they had tendered at a so-called 'premium.'

According to some financial analysts, the offeror is in a "no-lose situation". If the market price never exceeds the offer price, the mini-tender will be withdrawn, and the investors will never get their premium. If the stock's market price falls below the mini-tender price before the offer closes, the offeror may be able to reduce the offer price or even cancel the offer [2].

Then, why would holders ever participate in a mini-tender offer?

The most obvious and unfortunate reason is that the investor simply did not know. Through scenarios like the mini tender's 'premium', the offer can look like a traditional tender offer registered with the SEC and which is set to protect the investor. These offerors also play the "you snooze, you lose" tactic where they structure the offer on a first-come, first purchase basis, meaning the offeror accepts the shares in order of receipt. As a result, investors may feel as though they are missing out on an opportunity if they don't tender their shares immediately before having any reliable information about the terms of the offer.

On another note, some analysts claim that there may be some benefits to participating in a mini-tender. According to the Manitoba Financial Services Agency, if an individual holds less than a "board lot" of securities, tendering their securities in a mini-tender could help avoid minimum brokerage commissions that make the sale of their securities relatively costly [3].

Another claimed benefit is that mini-tenders often provide a market for investors to sell illiquid securities. Although this is largely disputed, many argue that if the offeror's goal is to buy and hold the securities for the long-term, mini-tenders could be a solution.

So why are we talking about this now?

In light of the recent increased volatility in the global financial markets triggered by the invasion of Ukraine, MCA has seen a 231% spike in the number of mini-tender offers launched in the first quarter of 2022 to both bonds and shareholders. With this in mind… "Beware the Mini-Tender" and "What's the Offeror's name, again?"

A few recent offers include:

A New Beginning

It has been nearly seven years since Puerto Rico first publicly announced its inability to pay its $74 billion debt. In what is known as one of the largest debt-restructurings in US history, the world of corporate actions has consequently seen thousands of related events; many of which have included some of the most complex arrangements in the business, such as Contra CUSIP transfers, two-digit options and pay-out processing, and the mere numbers of securities required for event creation in each reorganization.

Drum Roll, please…

On March 15, 2022, the Puerto Rican government announced the completion of their January 2022 Plan of Adjustment, which among many other details, included a $22 billion debt restructuring through a bond exchange offer for new general obligations. This act, alongside the PROMESA legislation established in 2016, allowed Puerto Rico to exit Bankruptcy officially. All in all, the U.S. Territory:

• reduced the total amount of central government debt from $34 billion to $7.4 billion;
• cut Puerto Rico's maximum annual debt service payments (what the island will have to repay annually in principal and interest on the central government's debt) from a maximum of $4.2 billion to $1.15 billion [4];
• and lowered its per capita debt by 86% [5], [6].

So, is Puerto Rico ready to join the financial markets again?

That is to be determined. Amidst the celebration still looms the unresolved bankruptcy proceedings for the $5.8 billion debt held by Puerto Rico's Highways and Transportation Authority and the Electric Power Company. Natalie Jeresko, an executive director that oversees Puerto Rico's finances and debt restructuring, states that the island still needs to get its audited financial statements up to date before making any market moves [7].

Omar Marrero, executive director of Puerto Rico's Fiscal Agency and Financial Advisory Authority, proves to be more hopeful as he states that the marketplace should understand that Puerto Rico is a new credit now, and "it's a stronger credit with the necessary guardrails in place to make sure that we don't get into the same mess" [8].

As Puerto Rico heads into a new phase of the bankruptcy process, our Managed Corporate Actions Team awaits the commonwealth's next course of action as we continue to provide the marketplace with the quickest and most accurate information [9].

Update: The Move to T+1

In the Untying the Knots - November 2021 edition, our Managed Corporate Actions experts discussed India's recent decision to transition its equity settlement cycle from T+2 to T+1, a plan which many countries aim to follow in the upcoming years. According to the original plan of action, the Market Infrastructure Institutions of India (MIIs), inclusive of Stock Exchanges, Clearing Corporations, and Depositories was, first set to transition the bottom 100 securities selected by the daily market capitalization averaged in October 2021, followed by the next 500 securities each month until eventually, all equity securities are following the T+1 settlement cycle period. This process began in February 2022 and is expected to end in January 2023.

What's the verdict?

Well, unless you trade in penny stocks, you probably haven't felt the immediate impact just yet. However, as larger stocks begin the follow the phased-in approach, investors will begin to see the credit of funds and shares within a day. While many local investors are excited to see what this future holds, foreign portfolio investors (FPIs) continue to vocalize their concern about the settlement compression they could face while operating in markets with different time zones, especially those related to trade confirmation and FX management.

Is it enough to halt the global trend?

While many of the concerns are valid, the Reserve Bank of India has worked diligently with these FPIs to ensure all their issues are met with the proper solutions. For example, one solution is designed to cutting down the processing time for trade payments from 5-6 hours to 3 hours, allowing the custodian more time to confirm trades and arrange money transfers [10].

Officials from the Reserve Bank of India say that such discussions should be resolved by June/July 2022.

Such confidence has seemingly opened the door for the next country to make its move: the US. In March 2022, the US Securities and Exchange Commission announced their supportive proposal to follow suit and shorten the US' trade settlement cycle from T+2 to T+1. The announcement itself is no surprise since the US has been discussing such a transition for 2+ years now. Still, the US refuses to remain far behind as the industry attempts to keep up with stock surges, market volatility, and technological automations [11].

Whether this most recent development stems from the common US phrase "Time is Money" or rather "Trial and Error", it's the US' turn to attempt the push to T+1, with an official compliance date of March 2024. More to come as our Managed Corporate Actions experts follow the global trend [12].

Russia's Expulsion from the Global Ecosystem - Can They Survive?

The invasion of Ukraine has left Russia crippled with severe economic impact, as governments worldwide have coordinated to issue historical economic sanctions on Russia. The impact already being realized in Russia includes a 15% inflation, mass exodus of private companies fleeing the market, severely disrupted supply chains, and loss of status as a major economy. Forecasts point to Russia's complete economic, financial, and technological isolation.

Recent developments in Bucha have stirred a fresh outcry in Ukrainian allies who have issued a fifth, aggressive round of sanctions, further stifling Russia's economic freedom and its ability to fund the war [13]. Further, the United Nations voted to suspend Russia from the Human Rights council [14].

Is it working?

Since our last publication, there have been several rounds of new sanctions across the globe, including import and export bans and rigid blocking of Russia's large financial institutions and banks, among others. With far too many to mention here, let's focus on some key developments that impact foreign shareholders and, ultimately, the state of Russia's economic health [15].

Russia debt repayment

Since February 24, foreign currency reserves held by the Russian Central Bank at US financial institutions were frozen however the US treasury was allowing Russia to make debt payments on dollar bonds at their discretion [16]. As of April 6, the US has prohibited Russia from making debt payments with funds subject to US jurisdiction, meaning Russia has to either draw down domestic dollar reserves to make debt payments, or default [17]. The newest sanction intends that Russia will choose to use dwindling USD funds to cover debt payments instead of continuing to fund the war. With 15 international bonds outstanding at face value of around $40 billion, Russia is facing potential financial demise.

Since the US cut off access to these funds last week, Russia has attempted to pay some debt in Rubles, but with sanctions in place, these payments are considered worthless and a default on the debt. There is a 30-day grace period, but will Russia pay up? If not, repercussions will be fierce. Mirroring the current sanctions, a debt default will prohibit Russia from accessing global markets until creditors are paid, and any legal issues are settled.

Update [April 13] – Looks like Russia is now planning legal action. According to Kremlin spokesperson, Dmitry Peskov, “there are no grounds for a real default” because Russia technically has the dollars needed to pay its debt, it just cannot obtain access to it. Nonetheless, the country had been warned that any payment in a currency different from the one the debt was sold under would be considered a ‘failure of payment’. Russia now resides in a state of ‘selective default.’ More to come as we await the end of the 30-day grace period. How will the courts rule? A monumental precedent in the making.

What ado about Depository Receipts

On April 6, the Russian Parliament adopted a bill requiring that Russian companies de-list depository receipts from foreign exchanges. This will come into effect ten days after the publication of the bill, and the depository shares will be converted into underlying equity shares that are traded in Russia [17].

Typically, a depository receipt termination comes with an offer to exchange the DR for local shares or receive a cash equivalent by default. Russia's intention to convert to equity shares isn't unusual unless, of course, the sale of the underlying shares is not possible. In a recent document circulated by the Association of Institutional Investors, officials state:

"In current circumstances the sale of the underlying shares may be not possible or may be executed with minimum prices. DRs holder may be stuck with holdings of DRs without any corporate rights or will receive unfair compensation."

Investors are left to ask, "Well then, what am I left with?" And here lies one of the main concerns.

These changes came after the collapse of the value of depository receipts on the London Stock Exchange and LSE's suspension of Russian securities and global depository receipts, so… who broke up with who?

Let's do the math

Russia faces additional total debt payments of $4.6 Billion in 2022. Although some bonds have contracts that allow the government to pay investors in Rubles rather than the currency denomination of the bond, the mounting scrutiny and restrictions on Russia's foreign currency and gold reserve by the international community, along with the cost of the invasion of Ukraine, is severely limiting Russia's ability to stave off these bond payments.

Will the new sanctions be enough to stop the war? Our Managed Corporate Actions Experts will continue to monitor future announcements made to all the above postings to ensure the most accurate and reliable corporate actions data coverage. Please reach out for more information or questions.

Interested in more? Please find:

Managed Corporate Actions' February Postings

Managed Corporate Actions' January Postings

Managed Corporate Action's November Postings

Managed Corporate Action's October Postings

Managed Corporate Action's September Postings

Managed Corporate Action's August Postings

Managed Corporate Action's July Postings

Managed Corporate Action's June Postings

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.