Reel coming soonDiscounted share issues: who pays the billshort video · 9:16AdvancedBrazilian REITs · Lesson A4.1 · Module A4
Discounted share issues: who pays the bill
Module A4: Events that change the fund
In this lesson
- The dilution math: book value from R$ 100 to R$ 96.67
- Why those who subscribe don't lose
- When a discounted issue makes sense
Brazilian REITs · Lesson A4.1
Issuing below book value: who pays?
When the fund sells new shares at a discount, the discount comes out of existing holders' pockets.
Same water, more glasses
The fund issues 500k shares at R$ 90
Offering costs left out to keep the math clear.
The issue price decides
Who wins depends on the price
Issue at R$ 90
Book R$ 96.67
- Existing holders lose 3.33%
Issue at R$ 100
Book R$ 100
- No value changes hands
Issue at R$ 110
Book R$ 103.33
- Existing holders gain 3.33%
The shield: pre-emptive rights
Subscribe pro rata and you don't lose
You bought “cheap” shares in the same proportion you lost book value.
“Issuing at market price is fair”
Not always: check price-to-book
is the discount to book value of issuing “at market” when shares trade at 0.85× book
The screen price can sit well below net assets. Then the issue moves value.
Not every discounted issue is bad
When it can still make sense
Can make sense
- The money buys assets earning more than the cost
- The discount is small next to the gain
- You use your pre-emptive right
Warning sign
- Issuing just to grow
- Big discount, vague use of funds
- Repeated issues below book value
The unitholders' representative must give an opinion on issues outside authorized capital (CVM Resolution 175, Annex III, art. 22).
Remember this
Three takeaways
- Below book, old holders payThe new shares' discount comes out of existing holders' book value.
- Pre-emptive rights protectSubscribing pro rata buys the discount, so you don't lose.
- “At market” can misleadAt 0.85× book, issuing at market is issuing 15% below book value.
Quick quiz · 1 of 2
Book value R$ 50. The fund issues half its current shares at R$ 45. New book value?
See answer
(R$ 50 + R$ 22.50) ÷ 1.5 = R$ 48.33. Each old share is worth R$ 50; half a new share brings in R$ 22.50.
Quick quiz · 2 of 2
You subscribed pro rata. Did the discount cost you?
See answer
No loss. Book value per share fell, but you own more shares: 1,500 × R$ 96.67 = R$ 100,000 + R$ 45,000.
Lesson complete
Next lesson
A4.2Advanced · Lesson A4.2Mergers, takeovers and spin-offs: who wins?When two funds become one, the exchange ratio decides who keeps the discount.Continue1 / 10
Use the ← → keys, swipe on your phone or tap the dots.
Image credits
- LeoNado10 · Wikimedia Commons · CC BY-SA 4.0 — Wikimedia Commons
- Willi Heidelbach · Wikimedia Commons · CC BY 2.0 — Wikimedia Commons
Educational content, written for learners. Not investment advice.