Nil-Paid

What Is Nil-Paid?

Nil-paid refers to rights attached to a security that are tradeable but which were originally issued at no cost to the seller.  Rights that can be traded are called renounceable rights. After they have been traded, the rights are known as nil-paid rights.

A right is an opportunity to purchase more shares, usually at a discount, given to shareholders by a corporation. The shareholders receive these rights at no cost, and if the rights are renounceable, the shareholders can choose to sell them on the market.

Understanding Nil-Paid

Though the word "nil-paid" may suggest that nil-paid rights give shareholders the right to acquire new shares for no cost, this is not the case. Nil-paid rights are only the right to acquire more shares at the current share price or a discount. The corporation issuing the rights to its shareholders does not receive payment for the rights, but if the shareholders decide to exercise the rights, they must pay for the securities they are given the right to buy.

Troubled companies often use rights offerings to raise money to pay down debt, but stable companies use rights offerings too — often to have the cash to fund more acquisitions.

To determine how much one might gain by selling the rights to shares held in a position, you need to estimate a value on the nil-paid rights ahead of time. Again, a precise number is difficult, but you can get a rough value by taking the value of the ex-rights price and subtracting the rights issue price. So, at the adjusted ex-rights price of $4.92 less $3, your nil-paid rights are worth $1.92 per share.

In some cases, rights are not transferable. These are known as "non-renounceable rights." But in most cases, rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or the underwriter. Rights that can be traded are called "renounceable rights," and after they have been traded, the rights are known as nil-paid rights.

If the share price on the open market were to decline to the point that it's cheaper to buy the shares than the nil-paid rights, the value of the nil-paid rights would become worthless, and the rights issue would likely fail.

Why Companies Do Nil-Paid Rights Offerings

Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its current financial obligations. Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money.