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How to read this case page
Each deal's case page, tab by tab: what each block measures, how to read it, which signals warn and what to do about them. Values the page lacks read N/D: they are never estimated.
1 · Tab: Header
Header: issuer, underwriting bank and the TERP equation
Identifies the issuing company, the underwriting bank syndicate, the subscription parity and the discount to TERP.
- What it is
- The control panel that audits the capital increase with tradable rights formally registered with the securities regulator (CNMV / SEC Form S-1).
- How to read it
- Check the subscription parity: shareholders receive 1 right for each share held and need a fixed number of rights to subscribe each block of new shares at a reduced price.
- Red flags
- Capital increases without a firm underwriting commitment, where the bank only acts as a best-efforts agent without guaranteeing the placement.
- Green flags
- A capital increase 100% underwritten by a top-tier international investment banking syndicate and backed by anchor shareholders.
- What to do
- Work out the intrinsic value of the right and compare it with its market price to spot arbitrage mismatches.
Concepts and formulas (2)
- Theoretical Ex-Rights Price (TERP)
- Weighted average of the value of the old shares and the issue price of the new shares after stripping out the right.
- TERP = ((Old Shares × Spot) + (New Shares × Issue Price)) / (Old Shares + New Shares)
- Theoretical value of the subscription right
- The mathematical intrinsic value of the right detached from the old share.
- Right Value = Spot - TERP = (Spot - Issue Price) / ((Old Ratio / New Ratio) + 1)
2 · Tab: Summary
Rights genome: discount to TERP and the syndicate
The pillars: issue price, discount to TERP, 100% firm underwriting by the bank syndicate and use of proceeds.
- What it is
- The contractual and financial structure of the capital increase. It confirms the banks' binding commitment to buy any unsubscribed share.
- How to read it
- The discount to TERP acts as a protective shield against market volatility during the 14 days the subscription period lasts.
- Red flags
- Proceeds used to plug recurring operating losses instead of earnings-accretive industrial acquisitions.
- Green flags
- 100% of the proceeds finance strategic acquisitions with a return on invested capital (ROIC) above 12%.
- What to do
- Check the 'Hard Underwriting' clause in the prospectus to confirm there are no MAC clauses that would let the bank withdraw its guarantee.
Concepts and formulas (4)
- Discount to TERP (%)
- The percentage reduction of the issue price against the theoretical value of the share after the capital increase.
- TERP Discount = ((TERP - Issue Price) / TERP) × 100
- Firm underwriting commitment (Hard Underwriting)
- The underwriting banks' legal obligation to subscribe at the issue price all the leftover capital that investors do not take up.
- Pre-emptive subscription period
- A non-extendable legal window (usually 14 to 15 calendar days) during which the rights trade and can be exercised.
- Rump Placement (accelerated placement of leftovers)
- A fast institutional auction to place, among qualified investors, the shares corresponding to unexercised rights.
3 · Tab: Summary
Entry window into the TERP discount
Weighs the guaranteed discount to TERP against the risk of a market fall.
- What it is
- The reading that establishes whether the discount offered by the issuer is enough to absorb stock-market volatility.
- How to read it
- A wide discount to TERP and a synthetic cost below the ex-rights share price leave a cushion against volatility. The case page does not compute an expected value: its Summary compares the spread with the downside to the unaffected price (T-1) through RAAS = P·Spread − (1−P)·Downside, and shows N/D when a sourced value is missing.
- Red flags
- TERP discounts below 5% in highly volatile sectors, where a market correction could wipe out the margin.
- Green flags
- Discounts above 15% fully underwritten by a bank syndicate in companies with predictable cash flows.
- What to do
- If you hold old shares, consider selling them in the market and buying them back at the same time through rights to capture the spread.
Concepts and formulas (2)
- TERP safety cushion
- The market fall the share can withstand before the subscription turns into a loss.
- Cash-and-carry rights arbitrage
- A combined strategy of selling shares for cash and buying the equivalent rights to monetise the difference.
4 · Tab: Critical path
Critical path of the capital increase: from registration to share delivery
A continuous axis: prospectus registration → ex-rights date → trading period (14 days) → allocation of leftovers → listing of the new shares.
- What it is
- The fixed legal timetable, regulated by the CNMV and the Spanish Companies Act, that governs a rights-issue process.
- How to read it
- The critical milestone for the investor is the close of the rights trading period: any right held must be exercised or sold.
- Red flags
- Letting rights lapse without instructing the broker, which wipes out their entire economic value if there is no automatic sale.
- Green flags
- Timely settlement of the additional allocations and immediate listing of the new shares with no registration delays.
- What to do
- Set calendar alerts for the ex-rights date and for 3 days before the close of the subscription period.
Concepts and formulas (4)
- Prospectus filing
- Official registration of the issue document approved by the securities regulator, describing all the terms.
- Close of rights trading
- The last trading session in which the rights are listed and can be bought or sold on the continuous market.
- Final share allocation
- The issuer's announcement of how many new shares each subscriber receives and how leftovers are distributed.
- Execution of the public deed
- Registration with the Companies Registry of the executed capital increase before admission to trading.
5 · Tab: Thesis & checklist
Growth thesis: use of proceeds and accretive impact
The capital rationale: the issuer raises funds to finance acquisitions that are accretive to free cash flow.
- What it is
- The industrial analysis that confirms the capital increase creates value for shareholders and is not a desperate need to plug financial holes.
- How to read it
- If the acquired assets generate long-term contracted cash flows linked to inflation, the capital increase secures growth in earnings per share over the medium term.
- Red flags
- Issuers that raise capital repeatedly without meeting the profitability targets promised in earlier capital increases.
- Green flags
- Full contractual visibility: 100% of the money raised is already committed to agreed and audited acquisitions with attractive returns.
- What to do
- Check that the project's return on capital employed (ROIC) exceeds the weighted average cost of capital (WACC).
Concepts and formulas (3)
- FCF per share accretion
- The increase in free cash flow per share generated by the newly acquired assets once the number of shares has been diluted.
- Built-to-suit pipeline
- Contractual infrastructure roll-out commitments that secure growing revenue for decades.
- Net leverage after the capital increase
- The temporary reduction in the net debt / EBITDA ratio after the cash from the capital increase comes in.
6 · Tab: Thesis & checklist
Investor control checklist: the 10 key questions (5 blocks)
A 5-block control protocol: prospectus and underwriting, the TERP equation, arbitrage parity, operational processing and industrial growth.
- What it is
- The definitive checklist before buying rights or executing a pre-emptive subscription in the market.
- How to read it
- Work through the 10 questions with the official prospectus in hand. Ten positive checks secure an arbitrage with no operational gaps.
- Red flags
- An unclear procedure for applying for leftover shares, or abusive custody fees on the rights.
- Green flags
- Answers verified in the CNMV/SEC prospectus and confirmation from the broker that it charges no fee to process the subscription.
- What to do
- Use this questionnaire to decide whether you should subscribe the new shares or sell the rights in the market.
Concepts and formulas (4)
- 5-block rights protocol
- A method that audits: I. Underwriting, II. TERP discount, III. Synthetic parity, IV. Broker deadlines and V. Investment thesis.
- Intermediary subscription fee
- The fee banks charge to process the subscription order for new shares; it must be checked beforehand.
- Allocation of leftover shares (Rump tranche)
- Proration rules for distributing the shares corresponding to lapsed, unsubscribed rights.
- Audit of the 5 forensic traps in rights issues
- A forensic verification protocol to protect the execution of a rights-issue arbitrage against market risk, deadline cutoffs and tax. Trap 1, the fallacy of arbitrage without borrow (Hard to Borrow): buying rights at a discount without simultaneously short-selling the shares is not an arbitrage but a directional bet until physical delivery at T+21. Trap 2, soft or conditional underwriting: a MAC clause in the underwriting agreement lets the syndicate cancel the capital increase in turbulent markets. Trap 3, premature expiry through the broker cutoff (Cutoff Drag): intermediaries stop accepting orders 2 to 4 business days before the legal end. Trap 4, a collapse from overhang and the Rump placement at T+21: on admission of the new shares, arbitrageurs buying back their shorts and banks placing the leftovers (ABB) push the physical share down. Trap 5, tax: since 01/01/2017 (Law 26/2014, art. 37.1.a of the Personal Income Tax Act) selling rights on the exchange is taxed as a capital gain subject to 19% withholding at source.
7 · Tab: Market
Price curve and ex-rights breakdown
Shows the price before the cutoff, the technical drop on the ex-rights date (the right is detached) and the parallel path of the right and the share towards the TERP.
- What it is
- The chart that models how the security behaves during the capital increase: from the cum-rights date to the admission of the new shares.
- How to read it
- Notice how on the ex-rights date the share falls by exactly the value of the right; from then on, selling pressure on the rights tends to open arbitrage windows.
- Red flags
- Massive dumping of rights during the last 2 trading days by careless investors who do not want to take up the issue and sell at any price.
- Green flags
- The price stabilises above the theoretical TERP with active institutional demand in the rights order book.
- What to do
- Take advantage of the 'last-day effect': sales of unexercised rights in the final 48 hours tend to depress their price, opening the widest asymmetry.
Concepts and formulas (4)
- Ex-rights date
- The first day the share trades without the pre-emptive subscription right; its price adjusts to the theoretical TERP.
- End-of-period volume (tail selling)
- Selling pressure from retail investors and passive institutions that dispose of rights in the last days.
- Right-share convergence
- The mathematical alignment, enforced by market makers, between the value of the right and the price of the old share.
- Admission date of the new shares
- The official day the subscribed shares start trading on the same terms as the old ones.
8 · Tab: Evidence
Prospectus audit and dilution
An audit of the accelerated bookbuild (ABB) clauses, management lock-up commitments and key shareholders' undertakings not to sell.
- What it is
- Reading the issue prospectus to detect whether large shareholders or executives plan to sell their rights or to subscribe in full.
- How to read it
- Express backing from anchor shareholders who commit to take up the issue validates the soundness of the deal.
- Red flags
- Senior executives sell 100% of their subscription rights on the exchange instead of taking up the capital increase.
- Green flags
- Irrevocable subscription undertakings from controlling shareholders covering more than 30% of the total amount raised.
- What to do
- Check the inside information notices to see whether directors have formally announced their intention to subscribe.
Concepts and formulas (4)
- Lock-up agreement
- A clause that bars the issuer and its directors from selling new shares for 90 to 180 days after the capital increase.
- Maximum effective dilution
- The percentage of voting share lost by a shareholder who neither takes up the capital increase nor sells the rights.
- MAC (Material Adverse Change) clause in the underwriting
- The extraordinary conditions under which the bank syndicate could terminate its guarantee; it must be tightly limited.
- Additional allocation tranche
- An option for subscribers to apply for leftover shares from investors who let their rights lapse unexercised.
9 · Tab: Parity & TERP
Quantitative telemetry: arbitrage between the share and the right
The spot price of the share, the price of the right, the synthetic price through rights, the arbitrage spread and the annualised IRR.
- What it is
- The calculation of the inefficiency between buying the share directly on the exchange and buying the rights needed to subscribe it at a discount.
- How to read it
- If buying rights lets you subscribe the share at a total cost below its market price, there is an arbitrage in selling the share and buying rights.
- Red flags
- Illiquid volume in the rights that prevents executing block purchases without slippage.
- Green flags
- High liquidity in the rights order book, allowing the parity arbitrage to be closed in milliseconds.
- What to do
- Execute the synthetic purchase: buy the rights on the exchange and place the pre-emptive subscription order with your intermediary.
Concepts and formulas (4)
- Synthetic cost of the share
- The total effective price of acquiring a new share by buying rights in the market and adding the issue price.
- Synthetic Cost = (Right Price × (Old Ratio / New Ratio)) + Issue Price
- Rights arbitrage spread
- The gap between the cash share and the synthetic cost through subscription.
- Spread = ((Share Spot - Synthetic Cost) / Synthetic Cost) × 100
- Annualised IRR of the capital increase
- The annualised yield from capturing the spread over the ultra-short 14-day cycle of the capital increase.
- Daily rights volume
- The number of rights traded each day in the continuous market's dedicated rights segment.
10 · Tab: Dilution & trading period
How the risk/reward pair evolves in rights issues
Maximum asymmetry on days 8 to 13 of the subscription period (Green Zone: cheap rights from disorderly selling); Red Zone once the subscription expires.
- What it is
- The operating traffic light that guides the investor on the best moment to buy rights and apply to subscribe new shares.
- How to read it
- The Green Zone switches on when investors without liquidity dispose of their rights, creating an artificial discount to the TERP.
- Red flags
- Buying rights in the first minutes of trading, when the speculative premium tends to overvalue the right.
- Green flags
- Buying rights when the synthetic cost offers more than a 5% direct discount to the cash price of the old share.
- What to do
- Place the subscription order with your bank at least 48 hours before the legal period closes.
Concepts and formulas (4)
- Asymmetry in rights
- The payoff is protected by the contractual discount of the issue price to the company's fundamental value.
- Green Zone (Day 8 to Day 13: optimal buying)
- The moment of maximum retail selling pressure on the rights; the widest discount for a synthetic subscription.
- Amber Zone (Day 1 to Day 7)
- Initial volatility and price formation in the rights segment.
- Red Zone (end of subscription)
- The rights lapse; unexercised rights lose 100% of their economic value.
Key-question checklist
Block I: Issue prospectus and bank underwriting
Q1: Is the capital increase 100% firmly underwritten by top-tier investment banks?
There must be a binding underwriting agreement signed by top-tier investment banks that guarantees subscription of 100% of the amount if any shares remain unsubscribed.
Q2: Has the issue prospectus been formally approved and registered with the CNMV with no outstanding requirements?
Check it at the CNMV (official verDoc link): the prospectus registered with the regulator's approval sets out the issue price, the timetable and the risk factors.
Block II: The TERP equation and the contractual discount
Q3: What is the theoretical ex-rights price (TERP) and what discount does the issue price offer?
Work out the TERP from the parity and the issue price in the prospectus, and compare the issue price with the TERP and with the unaffected price before the announcement: that gap is the contractual discount.
Q4: What is the theoretical value of the subscription right on the exchange?
Work out the theoretical value of the right and compare it with its market price: if retail selling pressure makes it cheaper, the effective subscription cost falls below the physical share and the arbitrage spread appears.
Block III: Anchor shareholder backing and dilution
Q5: What percentage of the capital increase have the controlling shareholders formally committed to?
Look in the prospectus and the inside information notices for the institutional shareholders' irrevocable undertakings to exercise all their rights, and for the share of capital they represent.
Q6: What dilution does a shareholder suffer who decides to sell the rights in the market?
The number of shares outstanding grows according to the issue parity. An investor who does not subscribe receives the cash from selling the rights but sees their voting share reduced proportionally.
Block IV: Forensic audit of stock borrow and broker deadlines
Q7: Is stock borrow immediately available to isolate the arbitrage from directional risk?
Confirm secured availability and a low borrow cost: only then is the spread locked in through a simultaneous short sale without falling into the Unhedged Arbitrage Fallacy (Trap 1). Liquid large-cap stocks usually meet this.
Q8: What is the operational cutoff date set by financial intermediaries (Broker Cutoff Drag)?
Even if the official deadline ends later, most banks and retail platforms stop accepting orders 48 to 72 hours earlier (Trap 3). Orders must be placed before that cutoff to avoid the rights lapsing and losing all their value.
Block V: Overhang risk at T+21 and the current tax regime
Q9: What risk of a collapse from overhang or the residual placement (Rump Placement) exists on the share admission date?
The residual tranche that retail investors do not subscribe will be placed on an accelerated basis by the bank syndicate (Trap 4). The anchor shareholders' undertakings and the strength of the business limit the likelihood of a severe downward shock on physical delivery at T+21.
Q10: How is the sale of rights on the market taxed in Spain?
Under the 2017 tax reform (Law 26/2014, art. 37.1.a of the Personal Income Tax Act, Trap 5), selling rights on the exchange is mandatorily taxed as a savings capital gain subject to 19% withholding at source. It no longer reduces the acquisition cost of the parent shares.