Story Highlights:
-Debt buybacks are becoming increasingly common, due to bonds trading at heavy discounts
-Issuers can retire or amend their corporate bonds through various methods
-Shareholders have incentives to make debt deals succeed, owing to bankruptcy related equity wipe outs
Back when corporations were swimming in cash, those in the Standard & Poor's 500-stock index spent well over $100 billion every quarter to buy back stock. In this year's first quarter, that total sank to just $30.8 billion, according to a June 18 S&P report, with ExxonMobil (XOM) accounting for a quarter of the outlays. Now some companies are using their piggy banks to repurchase something else: their own debt.
With crisis has come opportunity. For issuers with relatively higher ‘cash & cash equivalents’ that have corporate
bonds trading at significant discounts to par value, recent times are offering attractive opportunities to deleverage and/or amend restrictive covenants of their bonds. Many issuers recently have been launching repurchase programs or tender offers for their bonds in a bid to take advantage of these opportunities.
For example, The Pantry, Inc., a convenience store chain in the Southeastern United States, swung to a second quarter profit this year as it benefited from buying back $26 million in face value of outstanding bonds for
an aggregate purchase price of $19 million. Similarly, The Royal Bank of Scotland and many other banks have been buying back their bonds, which had been trading at heavy discounts, in a bid to boost their balance sheet and
increase their capital cushion.
In ‘crappy’ times such as now, issuers of corporate bonds trading at a significant discount should strongly consider these opportunities to deleverage, extend the maturity of the bonds or amend/eliminate the restrictive covenants of these securities as they may be able to realize significant cost savings and free themselves from covenant restrictions.
There are various methods through which issuers can retire or amend their corporate bonds including:
• open-market purchases – the issuer repurchases bonds that are available for sale in the bonds trading market (including in private trading markets for qualified institutional buyers (QIBs) only)
• private purchases – the issuer purchases the bonds directly from a bondholder in a privately negotiated sale, and
• debt tender offers – the issuer launches an offer to repurchase all or a portion of the outstanding bonds at a given price. Combined with a consent solicitation, the tender offer will result in amendments of the restrictive covenants of the bonds.
Although these debt deals aren't pitched to them, shareholders have good reason to want them to succeed. Bond buybacks could keep companies afloat, giving their stock some value. And in bankruptcy, equity is almost always wiped out.
So, agreed times have been quite rough this past year, but companies with higher liquidity and meatier low leverage balance sheets have done well to shield themselves from the crisis. By doing well, I mean they have survived, without being chopped into several pieces through asset sales, divestitures, distressed M&A and a host of other such depressing desperate transactions . The outlook is still pretty negative and most quarterly earnings have been gloomy. Those companies that seem to have ‘beaten Wall street’ expectations and estimates have mostly done so because of overly conservative assumptions on analysts’ ends. Let’s pray for the best.
