Subscription Rights
Subscription Rights are rights granted to eligible holders in a restructuring financing to purchase specified new securities on stated terms, often in proportion to qualifying claims, holdings or another allocation measure.
How it works
In Chapter 11, Subscription Rights frequently appear in rights offerings used to raise new capital for Plan Funding. The plan and offering documents specify who may participate, the subscription price, allocation formula, exercise procedures, transferability and treatment of oversubscription. The rights can have economic value when the subscription price is below the estimated value of the securities purchased.
Rights allocate access to new securities
The holder receives an opportunity to invest rather than an automatic distribution of the underlying securities.
Exercise requires new consideration
Unlike a debt-for-equity distribution, Subscription Rights usually require the holder to contribute cash to purchase the offered securities.
The allocation formula matters
Rights may be allocated by allowed claim amount, existing holdings or another court-approved measure.
Transferability can vary
Some rights are transferable, while others are limited to eligible holders and expire if not timely exercised.
Worked example: embedded discount
A holder can buy $1 million of new equity for $750,000 under the offering assumptions. The $250,000 implied discount can represent meaningful value if the equity valuation is realized.
Why unused rights matter
Unexercised allocations can pass to oversubscribing holders or Backstop Parties depending on the offering documents.
Common mistakes
Treating Subscription Rights as free shares; assuming all rights are transferable; ignoring required cash; and valuing the discount without post-emergence market risk.
Example
Eligible unsecured creditors receive rights allowing them to purchase new common shares at a 25% discount to plan equity value. A creditor with a larger allowed claim receives a proportionally larger subscription allocation.
Example
Eligible unsecured creditors receive rights allowing them to purchase new common shares at a 25% discount to plan equity value. A creditor with a larger allowed claim receives a proportionally larger subscription allocation.
Professional note
The value of Subscription Rights depends on the discount, expected post-emergence value, exercise cost, transfer restrictions and probability the plan reaches the Effective Date.
Related terms
- Rights Offering
A rights offering gives existing shareholders subscription rights to purchase newly issued securities, usually in proportion to current ownership.
- Plan Funding
Plan Funding is the cash, financing, asset-sale proceeds, retained liquidity, new investment or other resources used to satisfy distributions, administrative obligations and implementation costs required by a Chapter 11 plan.
- Plan Securities
Plan Securities are debt, equity, warrants or other securities issued or distributed as part of a Chapter 11 plan to implement the restructuring, fund the plan or provide consideration to creditors and interest holders.
- Backstop Commitment
A Backstop Commitment is a contractual undertaking by one or more investors to purchase securities or interests not subscribed for by eligible participants in a restructuring financing, helping assure the targeted capital raise will be funded.
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