News Flash -- Ares Capital (ARCC) Announces Rights Offering
Ares Capital
(ARCC) Announces Rights Offering
Published: 04/16/08 at
5:00
PM ET
The purchase price for the new shares will be determined after the offer expires at the market close on April 21st. If you exercise your rights and buy the shares before then, you will pay an estimated subscription price and then get a refund or pay an additional amount to make up the difference once the price is set.
The subscription price is based on 95% of the average share price between April 8th and April 21st. In other words, the rights give you a -5% discount on whatever the average selling price is on the open market.
Management added that it may decide to terminate the offering if the subscription price is less than 70% of the company's per share net asset value as of the latest earnings report. The shares were worth $15.47 each at the time of the firm's fourth-quarter earnings report, so a subscription price of less than $10.83 per share could result in the offer being cancelled.
As a "transferable" rights offering, shareholders can opt to sell some or all of their rights to buy new shares instead of exercising them. The rights are trading on the Nasdaq under the ticker symbol "ARCCR" through April 18th.
Investors can contact Ares Capital at 310-201-4200.
What Should You Do?
By exercising your right to buy additional shares at a below average price, you would reduce your cost basis. For example, say you bought 300 shares of ARCC at $17.00 two years ago for a total outlay (excluding commissions) of $5,100. Now, say you exercise your rights to another 100 shares at a hypothetical subscription price of $12.00 a share. The total of $6,300 for 400 shares gives you an average purchase price of $15.75.
If the share price rallies, you will rake in greater returns by holding more shares that you added at a lower price. But the reverse is also true. If the price falls, total losses will be greater because you now own more stock.
Generally, the share price of a security bottoms once the shares go ex-rights, as they no longer carry the privilege to buy more shares. After that, we may see a bounce.
Action To Take —-> More risk-tolerant investors may want to try to capture the potential bounce following the close of the offering. However, conservative investors should consider capturing an immediate payout by selling their rights on the open market.
We will have an update with more analysis of this stock in the May "Mid-Month Update," once the subscription price is announced.
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