3 Long-Term Warrants Not From TARP
Oct 20th 2013 5:00PM
Updated Oct 20th 2013 5:02PM
Long-term warrants are a great way for investors bullish on stocks to gain long-term leverage. Warrants issued to the Treasury, known as TARP warrants, are well known, but another set of warrants comes from other sources and are something investors interested in long-term warrants should consider.
At the epicenter of the financial meltdown was mega-insurer American International Group . During the crisis, shareholders underwent major dilution, followed by even more dilution when the government converted its massive preferred stock stake into common shares.
However, there was a sweetener tossed in for AIG shareholders, who received warrants to buy AIG shares at $45.00 per share until Jan. 19, 2021, to compensate for some of the dilution.
Today, these warrants trade as separate securities and allow investors to leverage AIG shares a little over two times. With AIG shares trading well below book value, a return of AIG shares to typical industry valuations could mean profits for AIG warrant holders.
When General Motors was restructured in bankruptcy, long-term warrants were used as partial payment to creditors. Although many creditors received only a small fraction of what they were owed, many sold the warrants to recoup this value, making the warrants now available to average investors.
GM Class A warrants expire July 10, 2016, and have an exercise price of $10 per share. GM Class B warrants expire July 10, 2019, and have an exercise price of $18.33. Despite offering nearly two times leverage over GM shares, the Class B warrants have a fairly small time premium and are worth a look for those bullish on GM shares.
GM is in a position to benefit from a rebound in auto sales as consumers seek to replace one of the oldest automotive fleets in history, and a recovery in home construction may also provide a boost to sales of GM's line of work trucks. In addition, the continuing government sales of GM shares are on track to eliminate the government's stake, removing an overhang of uncertainty. Both the Class A and Class B warrants offer investors increased exposure to this recovery.
As the mortgage market collapsed, it wasn't too surprising that mortgage and bond insurer Ambac Financial Group experienced tough times. In fact, times were very tough for shareholders as the company went through bankruptcy.
But after a restructuring, new shares of Ambac have been listed, with many of them going to the bankrupt Ambac's creditors. But along with the shares, Ambac warrants were also issued. These warrants currently represent some of the longest-term warrants in existence, expiring April 30, 2023, and having an exercise price of $16.67 per share.
Because of the large amount of time attached to the warrants, and because they're slightly in-the-money, Ambac warrants offer leverage of only 1.7 times. However, even with this smaller amount of leverage, Ambac warrants offer investors increased exposure to a rebound in bond insurance, as Ambac has a major presence in municipal bond insurance.
The TARP program offered investors long-term leveraged exposure to big banks, but the other crisis-related warrants offer investors similar exposure to insurance companies and a major automaker.
Investors bullish on the prospects of these companies should see whether these warrants are right for their portfolio and their overall investment strategy.
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The article 3 Long-Term Warrants Not From TARP originally appeared on Fool.com.Alexander MacLennan has long January 2015 $40 calls on General Motors. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends AIG and General Motors, owns shares of AIG, and has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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