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The Tender Touch
Sunday 5, January 2020

The Tender Touch

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This is not the start of a romantic novel!   Nope, we are discussing tenders in the bond world.  What is a tender?  To be more specific, a bond tender is an offer to bondholders to repurchase/buy back bonds (in whole or in part) at a specified price or at market price for a specified period.  Some of the recent bond tenders included Macy’s (offered at market price), Sagicor (done at a specified price) and Banco Columbia (market price).

Why do companies/governments use tenders?

Tenders play an important role in permitting companies to restructure their debt.  They may wish to retire some of their debt to reduce leverage, or it may be an effort to reduce their finance costs.  If interest rates are much lower than when the bond was originally issued, it may be a good time to reduce overall borrowing costs.  In addition, they may have a lot of liquidity and this may be, in their judgement, the best use of the excess funds.  Unfortunately, most times, you, the bondholder, will not benefit from the tender, and generally you will have to find lower yielding investments.

Tenders vs. callable bonds

When a bond is called, the investor has no options, the investor receives the cash consideration and the decision is taken out of the bondholders’ hands.  However, in the case of a tender, the investor has the option to participate.  This requires a detailed look at the tender offer- asking several questions.  Is the price attractive?  Do you have any attractive alternatives if you accept the cash?  Were you depending on this income to meet your obligations?  Has the company issued any guidance as to how they will treat bondholders who opt not to participate?  This is very important as there may be some implied punishment, or direct statement, regarding bondholders who reject the tender offer. 

While a company may issue a callable bond, or conduct a tender offer, there are other ways to restructure their finances.  In the case of tenders and callable bonds, the bondholder will normally receive cash in exchange for their bonds.  However, companies/governments also have the option to conduct debt exchanges, where instead of giving bondholders cash, they exchange existing debt for new securities.  A debt exchange is still a form of a tender and in the U.S. is subject to the same regulations.  They may also do bond buybacks where they literally buy back their bonds, however, this is usually done on a smaller scale, i.e. just a small portion of the outstanding bonds. Whichever option is chosen, speak to your financial advisor and always carefully evaluate the offer and the best alternatives.  Happy Investing!!!

Yanique Leiba-Ebanks, CFA, FRM, B.S.B.A., is the AVP, Pensions & Portfolio Investments at Sterling Asset Management.  Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor.  Visit our website at www.sterling.com.jm  Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm

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