Front Row at An Unusual Expiration – Ford Warrants

In the next few weeks we will have the chance to observe a somewhat unusual warrant expiration. On January 1, 2013 Ford (F) warrants (FWS) will expire, and therefore must be exercised by that date. The last trading day for the warrants, according to a Ford press release, is actually December 24, 2012.

What is unusual about this particular expiration is that the warrants are exercisable in a “non-cash” exchange. In other words, if you exercise Ford warrants you deliver the warrants to Ford and based on the closing price of Ford the day prior to your expiration you will receive a certain number of shares of Ford stock in exchange. The exact formula is a touch complicated, but not necessary for what we’re looking at here.

So, what are we interested in? We’re interested in the behavior of the stock post January 1, 2013. As we’ve referred to in our warrant trading guide, warrant arbitrage results in a stock being shorted while arbitrageurs simultaneously buy the warrants (or the transaction may be legged into). When the warrants expire there is often a “pop” in the shares of the common as the shorting pressure subsides.

Coinciding with the decrease in shorting in most warrant expirations that are in-the-money is an infusion of cash into the company from warrant holders exercising the warrants. This will not be the case in the Ford warrant expiration. The liability of the warrants will be cancelled by the issue of stock for the warrants, but no cash will be taken in by Ford.

It will be interesting to follow the results of the Ford warrant expiration. We will track the expiration here and post our thoughts on the impact as the expiration nears, and as we observe Ford common stock after the actual expiration date.