Shares in British Airways owner International Consolidated Airlines (IAG) are apparently down nearly 30% this morning to 137.6p.

But before investors panic that this dizzying descent is a sign of new distress for the troubled airline – this is a technical issue linked to the company’s rights issue as the shares trade ex-rights.

Having announced its plans at the end of July, the company launched a £2.5 billion rights issue last week as it looks to weather the Covid-inspired storm hammering the aviation sector.

This involved shareholders making the decision whether or not to buy discounted shares in the group.

Shareholders had four options. They could either buy some or all of their allocated stock; they could sell all their rights; they could sell some of their rights and potentially use the proceeds to buy some of the cut-price shares (known as ‘tail swallowing’); or they could do nothing at all.


The price of the newly-issued shares was fixed, and set below the prevailing market price. In order to calculate the price the shares should fall to after a rights issue, all things being equal, analysts seek to calculate the theoretical ex-rights price (TERP).

How does this work? Let’s suppose an investor held 100 shares in IAG ahead of its issue – we’ll use the listing on the Madrid stock exchange as the issue was priced in euros.

The market price of the shares was €2.21 the day before the terms of the ‘three-for-two’ rights issue (i.e. shareholders could buy three shares for every two they already owned) was announced. The subscription price for the extra shares was set at €0.92.

The value of the investor’s holding before the rights issue was €221 (100 x €2.21). If they decided to take up their full allocation they would have had to buy 150 shares at the new price of €0.92. In that case the amount of cash passing from investor to IAG would have been €138.

In order to arrive at the TERP we have to divide the new total value of the investment by the number of shares. In this case €359 divided by 250 to give €1.44.  At current exchange rates that translates as 133p, or slightly below the share price as we write.


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Issue Date: 14 Sep 2020