What is Cum Warrant?

Cum warrant, Latin for "with warrant," refers to a security where the buyer is entitled to the warrant even though it was declared prior to purchase.

Key Takeaways

  • Cum warrant, Latin for "with warrant," refers to a security where the buyer is entitled to the warrant even though it was declared prior to purchase.
  • Typically, bonds are the securities issued "cum warrant."
  • A cum warrant is similar to convertible debt, but when the holder exercises the warrant, they retain ownership of the bond, whereas when they exercise convertible debt, the bonds are exchanged for stocks.

Understanding Cum Warrant

Typically, bonds are the securities issued "cum warrant." A bond cum warrant has an attached warrant that allows the holder to acquire shares of the issuing company at a specific price and within a specific time frame, usually lasting a few to several years. A cum warrant is similar to convertible debt, but when the holder exercises the warrant, they retain ownership of the bond, whereas when they exercise convertible debt, the bonds are exchanged for stocks.

A cum warrant is more commonly called a "bond-cum-warrant" or "cum-warrant bond." Unlike a convertible bond, a cum warrant can be detached from a bond and either instrument can be sold separately before the warrant is exercised. The bond then becomes an ex-warrant bond with a lower value than the original bond. Cum warrant securities are common in international financial markets.

For example, in January 2018 Axelero SpA, an Italian internet company, issued bonds with warrants after receiving shareholder approval. The bonds were rated by an Italian credit rating agency and then the first tranche of the bond loan was released with over 300,000 issued warrants at a specified exercise price.

Like other cum-warrant bonds, these securities attracted investors who wish to receive an income stream from bond interest payments and participate in the potential upside in the equity of the company if the stock price surpasses the warrant exercise price in the future.

The other attractive feature of the security is the ability of an investor to separate the bond from the warrant for trading. For the issuer, the main benefit is lower interest expense. Existing shareholders, however, are generally not in favor of this type of financing because they face the potential of dilution if warrants are exercised.