What is a Tranche Warrant?

K.M. Doyle

A tranche warrant is a part, or tranche, of an issue of securities with warrants that gives the purchaser the right, but not the obligation, to purchase a specific security. If an offering includes two or more tranches, some or all of the tranches may include a warrant. A tranche warrant offering may have tranches with different maturities or different levels of risk. Tranches are paid in a prescribed order of priority when the maturity date arrives.

A tranche warrant calls for significant due diligence on the part of the investor.
A tranche warrant calls for significant due diligence on the part of the investor.

A tranche is part of a larger securities offering. Offerings are divided into tranches so that parts of a bond issue, for example, can have different maturity dates. This means that the entire issue does not mature at one time, giving the issuer more flexibility when paying the bonds at maturity. Different tranches will have different degrees of risk to the investor. A 20-year tranche has greater risk than a 5-year tranche of the same security.

A warrant is a derivative security that is issued along with other stocks or bonds, and gives the purchaser the right to buy shares of stock in the future at a specified price. Stock warrants (also called stock-purchase warrants) are often issued in conjunction with preferred stock or bonds in order to make the purchase more attractive to investors. The purchaser of a warrant is not obligated to purchase the security, but has the option to do so if the price is attractive. If the purchaser chooses not to exercise a warrant by purchasing the security within the specified time frame, the warrant simply expires.

Sometimes an offering is made in two or more tranches to allow for additional funding after the completion of the first tranche. A company may make a stock offering while reserving the right to offer additional shares in a second tranche if the first tranche does not provide enough equity, or if additional financing is needed within a relatively short period of time. The second tranche will often include a tranche warrant to make the purchase a more attractive investment. There may be a premium in price for the tranche warrant or it may be included with all shares in the tranche.

A tranche warrant is a sophisticated investment and is often used by companies seeking venture capital. This type of investing calls for significant due diligence on the part of the investor. It is important to understand the company making the offering and the risks involved.

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