To Tender or Not to Tender?

Imagine you have been comfortably holding your bond for several years and you see on the financial news the issuers of your bond have made a tender offer to buy back this bond. What would you do? This may cause instant panic or feelings of uncertainty, especially if you have never experienced this situation before. What is a tender offer? Why would the issuer of the bond do this? Is your investment secure?

A bond tender offer is a formal offer to bondholders to repurchase/buy back bonds (in whole or in part) at a specified price or at current market price for a specified period. The decision whether to participate or not is generally not an easy one as there are several factors to consider.

Why do issuers make use of tenders?

The coupon (interest) payments that the investor receives from bonds represent debt obligations of the issuer. Tenders can be used by issuers to manage their debt obligations. If interest rates are lower than when the bond was first issued, then conditions are favourable for them to reduce their liabilities by repurchasing existing bonds and issuing new ones at lower interest rates comparable to current market rates. Also, if the issuer has excess liquidity, they may consider this a good option to use their cash holdings to reduce high interest debt. If you do decide to accept, it is important to note that not all tenders come with wholesale acceptance from the issuer. Acceptance of tender offers may also be made on a priority basis. Therefore, your acceptance of the offer may not be fulfilled, in that instance.

Recently Dell Technologies announced a cash tender offer for certain outstanding securities. Investors would have to consider if acceptance made sense for them. Here are a few questions the bond holders should ask before making their decision.

Is the tender price being offered at market level? If the offer price is below the market price you may want to decline as selling in the open market could result in a better return. Now if the price is above the market price an immediate yes is still not your only option. Further consideration should be given to other factors.

Ask yourself if I accept this tender, is there a suitable replacement available? If you were dependent upon the coupon payments for income streams are other bonds in the market yielding similar returns with the same risk profile you are comfortable with? Do the other bonds in the market work with your investment timeline? If the potential replacement bond is a callable bond does the yield to call fit with your current investment strategy? Remember participating in a tender is optional. You can decline the offer and continue to hold your bond and enjoy the income stream or sell the bond on the open market at a later date.

The decision should not be taken lightly or left up to guess work. As always speak with your financial advisor to discuss the offer and determine which option works best for your individual investment strategy.

Christine Rankine is the Manager -Personal Financial Planning 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

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