Catalyst Paper Corp. (TSE: CTL) is a producer of specialty printing papers and newsprint in North America, including lightweight coated, uncoated mechanical papers and directory paper. The company recently filed a short-term prospectus in their F-10/A filing with the SEC related to its previously announced rights offering for gross proceeds of C$125.3 million. Under the proposed offering, each shareholder would receive one right per common share that they hold that would essentially give them an option with an exercise price of $0.75 per share. As with many rights offerings, this may be a situation worth watching closely!

Rights offerings are interesting since they can often result in the ability to essentially purchase “call options” for pennies on the dollar. Existing shareholders should always exercise or sell their rights, since their existing holdings will be diluted as a result of the offering. However, there are many investors who do not pay attention and rights offering often have extra securities available that weren’t exercised by shareholders. These extra shares are often made available to existing shareholders to purchase, which obviously represents a great opportunity to obtain the cheap “call option” on the stock.

The second half of the opportunity worth watching is the secondary market for these rights, which will trade on the TSX alongside the normal stock. Many shareholders will take the rights but not exercise them because it requires that they put additional capital into the company. As a result, they sell these rights on the secondary market. This increased selling can put downside pressure on the market price for the rights given the fact that there will likely be limited demand all at once. And this can create an attractive buying opportunity for enterprising investors! Combined, this rights offering is a situation that is definitely worth watching!

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