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Lufthansa: This is how subscription rights work!

Lufthansa: This is how subscription rights work!
Lufthansa: This is how subscription rights work!

Lufthansa had to be saved by the German state in the Corona crisis. Among other things, the Economic Stabilization Fund (WSF) provided silent participations, from which Lufthansa has called 2.5 billion euros. Lufthansa now wants to repay this money, initially 1.5 billion euros with the funds from the capital increase and then the remaining billion euros by Christmas. In addition, the equity base and liquidity are to be strengthened through the capital increase.

Lufthansa gets the fresh money from the shareholders as part of a capital increase with subscription rights trading. The subscription right is nothing other than a right of the previous shareholders to receive the new shares at the issue price and in the respective subscription ratio. Because the total number of shares increases with a capital increase, the share of the previous shareholders in the company’s equity decreases. The shares of the previous shareholders will be diluted by the issue of new shares. In order to protect existing shareholders from such dilution, the legislature generally provides for subscription rights to be issued in the event of capital increases of more than ten percent of equity.

In the case of Lufthansa, the number of shares will double as a result of the capital increase, from 597,742,822 shares through the issue of 597,742,822 additional shares to 1,195,485,644 shares. The subscription ratio for the capital increase is accordingly 1: 1. For each share held, each shareholder has the right to purchase one additional share at the subscription price of EUR 3.58.

The new shares are being offered at a significant discount to the previous price. The subscription price of EUR 3.58 per new share corresponds to a discount of around 56.4 percent compared to the closing price on September 17, 2021, the last trading day before Lufthansa announced its capital increase.

Lufthansa share

On Wednesday, the shares of Deutsche Lufthansa are now quoted ex subscription rights. This means that Lufthansa shareholders get a subscription right for each share in their custody account. The shareholder can either redeem the subscription right, i.e. purchase another share for EUR 3.58, or sell the subscription right if he does not want to participate in the capital increase. In order to redeem the subscription right, he must contact his broker and instruct it to do so.

Because the subscription right itself has a value (after all, you can use it to buy shares at a lower price!), The price of Lufthansa shares falls. At Lufthansa, this discount will be very clear tomorrow!

Based on the Xetra closing price on Tuesday, one Lufthansa share costs 8.377 euros. Based on this rate, the price of the subscription right is calculated as follows:

Subscription right price = (old share price – issue price of new shares) / (subscription ratio + 1) = (8,377 – 3,58) / ((1/1) + 1) = 5,02 / 2 = 2,3985 Euro.

The Lufthansa share would be cheaper from 8.377 euros to 5.9785 euros, which corresponds to an (optical) price reduction of 28.6 percent! For the shareholder, however, this is not a real loss, because he receives a subscription right for each Lufthansa share in the custody account, which is worth 2.3985 euros and thus precisely compensates for the loss in value due to the issue of subscription rights. (The courses can of course still change.)

In addition, the price of the subscription right plus the subscription price of EUR 3.58 should correspond to the share price after the subscription right discount, i.e. the following equation should approximately be fulfilled:

Price of subscription rights + EUR 3.58 = share price (after deduction of subscription rights), i.e. based on the rates assumed above 2.3985 + 3.58 = 5.9785. However, the courses are of course not constant. Both the price of the Lufthansa share and the price of the subscription rights are influenced by supply and demand. Both courses can change continuously.

If the last-mentioned relationship between the price of the subscription right and the price of the share is not fulfilled, one could theoretically (before costs) earn money through arbitrage. As my colleague Daniel Kühn writes in his Guidants stream: “If the subscription right is clearly too cheap, one could sell the share or go short and buy the subscription right instead owns) and buys the stock. ” (As a rule, however, this should not be worthwhile for private investors, especially not after costs.)

Trading in subscription rights begins on Wednesday (September 22nd) and ends on September 30th. The subscription period for the new shares ends on October 5th. Up to this point in time, private investors who have Lufthansa subscription rights in their custody account must decide whether they want to exercise the subscription rights or sell them. “Subscription rights that are neither exercised nor sold expire without replacement when the subscription period expires. Compensation for subscription rights that are not exercised or sold is not paid,” emphasizes Lufthansa. However, the broker usually sells the subscription rights on the last day of the subscription period if the shareholder has neither sold the subscription rights nor instructed them to exercise them.

Incidentally, there is no risk that Lufthansa will not be able to place all of its new shares. A consortium of 14 banks guarantees the capital increase. So if some of the shares are not subscribed, the banks will buy the remaining shares. In addition, several BlackRock funds and all Lufthansa Management Board members have agreed to participate in the capital increase and to fully exercise subscription rights for the shares held.


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