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Warrants

J

Jesoos

Member
Ch4 p.28 - In the last paragraph on the page in Section 3.2 on Warrants.

"Warrants are also often given to investment banks as compensation for underwriting services or used to compensate creditors in the case of bankruptcy."

As per the definition, a warrant gives the holder the option to buy the company's shares (which is also the writer of the option).

However, if the company is bankrupt and cannot pay its creditors, then how does the warrant benefit the creditor. It is given as compensation to creditors in case of bankruptcy, but if the company is bankrupt, then the creditors could/would not want to buy the company's shares? Probably the share price would be well below the strike price of the call option (i.e. warrant), so it would be out of the money?

So how does this benefit the creditors?

Thank you!
 
It does seem slightly odd! The idea is that even if the company is bankrupt it may still have value (assets/order books/inventories/intangibles). In this case the creditors may be able to exercise their warrants and take over the company as a going concern rather than let it go bust and lose their money completely.
 
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