Definition of the detachable mandate
What is a detachable mandate?
A detachable warrant is a derivative attached to a security, which gives its holder the right to buy the underlying asset at a specific price within a certain period of time.
Key points to remember
- A detachable warrant is a derivative contract attached to a security, which gives its holder the right to buy the underlying asset at a specific price within a certain period of time.
- Investors who hold detachable warrants can sell them while retaining the underlying security, or sell the underlying securities while retaining the warrants.
- Because they are attached to preferred stocks, investors must sell warrants if they want to receive dividends.
Understanding Detachable Warrants
Often combined with various forms of debt securities issues, detachable warrants can be withdrawn by the holder and sold separately on the secondary market. Thus, an investor who holds detachable warrants can sell them while retaining the underlying security, or he can sell the underlying securities while retaining the warrants.
A warrant is a security that gives its holder the right, but not the obligation, to buy a certain number of shares of the issuing company at a fixed price before a fixed date. In this way, a warrant is similar to a call option. Warrants are often attached to preferred stocks or newly issued bonds to encourage demand for debt securities.
Warrants are often detachable. A detachable warrant can be exchanged independently of the package with which it was offered. Many corporate issuers choose detachable warrants when issuing bonds because it makes a debt offering more attractive and can be a cost-effective method of raising new capital.
The exposure to rights provided by a detachable warrant can often attract the attention of investors who do not typically participate in the fixed income markets. Indeed, a bond issuer includes detachable warrants in its sale of debt securities in order to obtain a lower interest rate and cost of borrowing than would be possible without the warrants, while a buyer of Bonds is interested in the profit it might make by converting the stock warrants if the issuer’s stock price rises.
Because they are attached to preferred stock, investors may not be able to receive dividends while they hold the warrants. Investors wishing to derive income from the dividend may find it prudent to detach and sell the warrant and retain the security in order to begin receiving the dividend.
Investors must sell their warrants if they want to earn dividend income from the underlying securities.
An investor who owns bonds with attached warrants can sell those warrants separately while retaining the actual bonds. Similarly, the investor could sell the bonds and keep the warrants. The two titles are therefore treated separately even if they are issued in a single bundle. This makes warrants detachable unlike call options, which are not detachable. The holder of a detachable warrant can optionally exercise it and buy the shares of the entity or let it expire.
For example, an investor holds a bond with a face value of $1,000 with a detachable warrant to buy 30 shares of the issuing company at $25 per share over the next five years. If the investor does not expect the price of the common stock to reach $25 within five years, they have the option of selling the warrant on the open market, while keeping the bond. The investor can also do nothing and let the warrants expire after the five-year period. Also, the investor could sell the bond and hold the warrant until it is exercised or expires.
Detachable vs. Indetachable Mandates
Unlike detachable warrants, detachable warrants cannot be separated from their underlying securities. This means that investors who hold these types of warrants must sell both the warrants and the underlying assets at the same time. The same applies if they decide to sell the underlying securities, the warrants must be sold at the same time. Thus, once one is sold, the other is automatically transferred to the buyer.