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What is a debt buyback offer?

A debt takeover bid occurs when a company redeems some or all of its outstanding bonds or other debt securities. This is accomplished by making an offer to its creditors to buy back a predetermined number of bonds at a specified price and for a specified period of time.

Companies can use a debt tender offer as a mechanism for restructuring or refinancing capital. It is similar to a public tender offer, where a company solicits shareholders to buy back the shares of the company.

Key points to remember

  • A debt tender offer is a public solicitation of bondholders of a company asking them to resell their bonds or debt securities at a specified price and for a certain period of time.
  • Companies will consider a takeover bid when interest rates fall, making the cost of borrowing cheaper than holding onto older bonds at higher fixed coupons.
  • The takeover bid may be made in cash or by exchanging old bonds for newly issued debt securities of equivalent value.

Understanding debt buyback offers

When a company issues debt securities such as bonds, it receives a capital loan from the investors who buy it. To compensate these creditors for the borrowed funds, the issuer will typically pay regular interest or coupons to the holders of the debt in addition to promising to repay the principal when the bond matures.

Interest payments, which are often fixed, represent a cost of debt for the issuer. It is possible that prevailing interest rates in the economy will change during the life of the bond. When interest rates rise, the value of existing bonds decreases since the coupon rate is lower than the prevailing interest rate. Similarly, when interest rates in the economy decline, issuers will be forced to pay the higher coupon rates attached to the bond unless they restructure their debt securities.

One method of debt restructuring to take advantage of lower borrowing costs is to make a public debt tender offer to bondholders. In other words, corporate bond issuers are turning to debt takeover bids as a way to eliminate or reduce over-leveraged, risky or high-cost capital structures.

Although tenders have many advantages, they have some disadvantages. A takeover bid can be a long and expensive process, as custodian banks verify the bonds presented and issue payments on behalf of the creditors.

Types of takeover bids

A debt tender offer is an opportunity for an issuing company to redeem its existing bonds at a price below the original face value and, therefore, reduce its related interest costs. In this case, the company offers bondholders the option of repurchasing all or part of the debt securities it has in return for cash or by exchanging them for newly issued debt securities.

Cash tender offer

When an issuing company makes a cash tender offer, it is making a tender offer for some or all of its outstanding debt securities. A highly indebted company may wish to use its retained earnings to buy back bonds to reduce its debt-to-equity (D/E) ratio. This will give the business a greater margin of safety against bankruptcy since the business will pay less interest.

Securities accepted in the tender offer are generally purchased, withdrawn and canceled by the issuing company, and will no longer remain outstanding obligations in the financial statements.

Debt swap offer

A company that does not have access to the necessary cash to issue a cash tender offer can, in turn, make an offer to the holders of its outstanding debt securities, agreeing to exchange the newly issued debt for outstanding debt securities. The terms of newly issued debt will generally be more favorable to the issuing company.

Debt tender offer requirements

Offers to buy and exchange debt securities are subject to the offer to buy rules described in Securities and Exchange Commission (SEC) Rule 14E under the United States Securities Exchange Act of 1934 .

Regulation 14E prohibits buying and selling based on material nonpublic information. It also requires that the take-over bid be kept open for at least 20 business days from commencement and 10 business days from notice of a change in the percentage of securities sought, consideration offered or Broker solicitation fee.

The tender offer has only a limited duration. In addition, the offer to buy the bonds is set at a price above the current market value but below the face value of the bonds. Since only a minimum bond buyback amount is permitted, investors cannot negotiate the terms of the debt tender offer.

Example of a tender offer

On June 13, 2022, Ford (F) launched a cash tender offer to purchase up to $2.5 billion of certain outstanding debt securities in an effort to reduce its overall interest expense. Offer expired June 17, 2022.

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