Cum Warrant

What Is Cum Warrant?

Cum warrant, Latin for "with warrant," refers to a security where the buyer is entitled to the warrant even though it was declared prior to purchase.

Cum warrant may be contrasted with ex-warrant and compared with cum dividend.

Understanding Cum Warrant

A warrant is a specialized type of security that may be issued along with a bond or stock. In some ways, warrants resemble stock options. The warrant entitles the holder the opportunity to purchase a particular number of common stock at a specified price called the strike price. The strike price is generally set higher than the market price at the time of issuance. The ability to purchase shares at the strike price is usually available for a certain amount of time, up to the expiry date, although it can be to perpetuity. 

Warrants are priced similar to call options in that they gain value as the price approaches and moves above the strike price, and warrants with a longer time until expiry will have more value than a comparable warrant with a shorter duration till expiry. This is because with more time there is a greater chance that the warrant will eventually move above the strike price.

Warrants are often issued as a form of sweetener — that is, they enhance or otherwise help make certain securities like fixed income more marketable. Warrants are freely transferable and trade on the major exchanges, meaning the recipient of warrants can sell them separately or detach them from the security they were issued with. But an investor buying a bond or preferred stock that came with warrants needs to recognize whether the security trades ex-warrant or not.

Typically, bonds are the securities issued "cum warrant." A bond cum warrant has an attached warrant that allows the holder to acquire shares of the issuing company at a specific price and within a specific time frame, usually lasting a few to several years. A cum warrant is similar to convertible debt, but when the holder exercises the warrant, they retain ownership of the bond, whereas when they exercise convertible debt, the bonds are exchanged for stocks.

A cum warrant is more commonly called a "bond-cum-warrant" or "cum-warrant bond." Unlike a convertible bond, a cum warrant can be detached from a bond and either instrument can be sold separately before the warrant is exercised. The bond then becomes an ex-warrant bond with a lower value than the original bond. Cum warrant securities are common in international financial markets.

Example of Cum Warrant

For example, Axelero SpA, an Italian internet company, issued bonds with warrants after receiving shareholder approval. The bonds were rated by an Italian credit rating agency and then the first tranche of the bond loan was released with over 300,000 issued warrants at a specified exercise price.

Like other cum-warrant bonds, these securities attracted investors who wish to receive an income stream from bond interest payments and participate in the potential upside in the equity of the company if the stock price surpasses the warrant exercise price in the future.

The other attractive feature of the security is the ability of an investor to separate the bond from the warrant for trading. For the issuer, the main benefit is lower interest expense. Existing shareholders, however, are generally not in favor of this type of financing because they face the potential of dilution if warrants are exercised.