ERI owner Lionhart’s notice on warrant takes Lanka by surprise

A notice by Lionhart Investment Ltd., the majority owner of Environmental Resources Investment Plc, yesterday took Sri Lanka’s capital markets by surprise causing confusion among various stakeholders.

Lionhart, a global alternative investment manager which owns 85% stake in ERI, yesterday placed a notice in a state owned daily on the upcoming exercising of 2011 Warrants of ERI.

The warrant concerned is GREG.W0001 which was issued to the share holders along with second rights issue of the company. 104,316,480 warrants were issued at price of Rs. 24. The 2011 warrants were to cease to trade yesterday and expiration date of the warrants was 3 June and the exercise price was Rs. 24 per ordinary share. Warrant holders are required to exercise their right to convert the warrants to ordinary shares before 4 p.m. on 3 June. If not exercised on or before 3 June warrant holders will not have rights whatsoever thereafter.

Lionhart owns 98.3 million of the said warrants or 94% of the total.

The notice said that on 9 May Lionhart as shareholders of over 85% had passed a resolution to defer, a) the issue/allotment and/or purchase of shares under the 2011 warrants and b) the period of exercise of the Warrants should commence on 1 November, 2011 and expire on 21 December and accordingly the cut off date of the 2011 warrants shall mean 1 Novemebr and the expiration date shall mean 21 December. The notice also said that Lionhart resolved  that the Colombo Stock Exchange shall be notified of the variations  adding that Lionhart as holding 98 million of the said warrants have consented to the variations and/or deferment of the exercise period.

In view of the above Lionhart said ERI is legally bound by the raisd resolution.

Originally the 2011 Warrants were approved at an EGM of ERI on April 23, 2009.

Daily FT learns that the notice was placed by Lionhart without the knowledge of the management of ERI whilst it also took the Securities and Exchange Commission (SEC) and the Colombo Stock Exchange (CSE) by surprise apart from local shareholders and warrant holders of ERI.

The said Warrants last week closed at Rs. 31.70, down by Rs. 3.10. It finished third quarter (December 31st) at Rs. 72.40, up from Rs. 37.25 a year earlier. ERI also has warrants, exercisable in 2012 (at Rs. 33), 2014 (at Rs. 36) and 2015 (at Rs. 39), currently trading on the Bourse. Lionhart owns 90% of these warrants as well.

Lionhart notice implies that it wasn’t willing to exercise the warrants as yet though it hadn’t given any reasons why. Analysts speculated that deferment could be due to the poor performance of the ERI share which yesterday dipped by Rs. 2.40 to close at Rs. 67.40.  Warrants 2012, dipped by Rs. 2.10 to Rs. 31.40, Warrants 2014 by Rs. 1.40 to Rs. 28 and Warrants 2015 by one rupee to close at Rs. 28.40 whilst Warrants 2010 dipped by 40 cents to Rs. 43.90.

There were diverse opinions on the Lionhart move as well as many rumours. Some said there aren’t effective laws to deal with derivatives under which category warrants fall. It was also argued that major shareholder cannot pass resolutions on behalf of the Company but perhaps an EGM could have been conveyed and pass the resolution at ERI shareholder or warrantholder level.

Officials of regulatory bodies as well as ERI couldn’t be reached for comment.

Lionhart (http://www.lionhart.net) is a global alternative investment manager that delivers strong, absolute, and non-correlated annual returns in the following areas: Asian Multi-Strategy, Global Distressed & Credit, Natural Resources and Private Equity. It advises multiple portfolios in a risk averse manner on a global, multi-strategic arbitrage basis, including Private Equity/Venture Captial in Natural Resources. Lionhart has offices in Singapore, London, New York and Toronto.

As per its web site Lionhart was founded in 1993 by Terrence Duffy with less than $10 million, the genesis of Lionhart was Asian convertible bonds and warrant arbitrage traded from London. Lionhart has evolved into a truly global organization that allocates capital across different strategies in various industry sectors and asset classes. Its core expertise complements our vigorous commitment to innovative investment strategies and in-depth risk management. This philosophy has allowed Lionhart to produce above-average returns sixteen out of the last seventeen years.