r/valueinvesting
Xerox warrants in exchange for the debt selling below par
Author explores a potential arbitrage in XRX warrants, where holders can exercise using deeply discounted designated notes at par value.
- Potential arbitrage exists as warrants can be exercised using designated notes trading at a ~30% discount to par.
- Actual exercise cost is significantly lower than the nominal $8 strike price due to the debt discount.
- The arbitrage window is strictly limited and terminates if the stock price stays above $4 for 20 out of 30 days.
- Execution complexity for small investors might be high due to the specific mechanics of tendering notes.
Can you, as a small investor, perform the arbitrage on the Xerox warrants?
The situation is like this:
Warrants carry an $8 exercise price (current stock price 3.4), but holders can pay it by surrendering Designated Notes at par instead of cash — and the notes trade at \~30% of par (e.g. the 2035 maturity , the 2039 maturity, 2030 convertible notes ).
The arbitrage opens in the above $3 per share, not at $8. Note holders tender at par against an $8 strike while notes trade at a discount. The window closes above $4 (20 of 30 days), when the debt - for-equity right terminates.
The main barrier for retail is the bid-ask spread on the debt. Corporate bonds trade in over-the-counter markets where retail brokers mark up odd lots by 3% to 5%. If you buy the 2035 or 2039 notes at 30% of par, that spread immediately eats into the discount. The second issue is the settlement lag. Surrendering physical debt through a broker to exercise warrants takes at least 3 business days, and sometimes over 7 days depending on the transfer agent. To lock in the arbitrage, you must short the stock immediately. Xerox stock is hard to borrow, and the borrow rate is currently high, meaning you will pay a steep fee to maintain the short position while waiting for the shares to deliver. If you do not short the stock, you are just taking a long position in Xerox with extra steps. You are exposed to the stock falling below your effective exercise price during the settlement window.
Thank you very much.
interesting setup..... whenever something looks this obvious i start wondering where the catch is
have you checked the exact warrant terms..... feels like there must be some restriction or timing risk hiding in the fine print
The restrictions seem to be only that one above 4$ and above 8$. Also the 6% shareholder (Starteepo) is pointing it out in their presentation (page 25).
How small?