Why don't more companies use market markets to buy their debt?
I was reading the Nomad Partnership papers and I came across an interesting statement on page 15 in regards to the Nomad partnership trying but failing to buy a company's bond that they thought were trading at discounts to face value. The statement goes "Indeed, it appears in one case that the company, as part of a debt repurchase program, may have had a standing order with all the market makers on Wall Street to buy any of its bonds that were offered and to let none remain in the hands of third parties."
The authors applauded this company's management for their diligence, but it seems odd to me why most firms wouldn't do this when they are conducting a debt buyback, especially considering that market makers have such strong trade execution abilities. Won't it be more prudent to snap up the now unvalued debt you issued right away instead of waiting for investors to buy it and force you to buy it from them at a premium?
Ah, you've hit upon a fascinating topic! There are a few reasons why companies might not always use market makers to buy back their debt, even if it seems like a smart move.
Firstly, not all companies have the same level of financial sophistication or resources. Some might not even be aware of the option to use market makers for this purpose, or they might not have the necessary relationships in place.
Secondly, buying back debt can be a complex process that requires careful planning and execution. It's not just about snapping up undervalued debt - companies also need to consider their overall capital structure, liquidity position, and future financing needs.
Lastly, there's the issue of market perception. If a company is seen to be aggressively buying back its own debt, it could send a signal to the market that the company is in financial distress, which could potentially lead to a drop in its stock price or other negative consequences.
So while it might seem like a no-brainer to use market makers to buy back debt, the reality is a bit more complicated. It's a strategy that can work well in certain situations, but it's not a one-size-fits-all solution.
Sources: 21 Finance Interview Questions and Answers, https://www.wallstreetoasis.com/forum/trading/converts-trading?customgpt=1, Distressed debt / special sits investing - On the job, Reminder: M&A Markets are a LAGGING indicator
Guess I’ll take a crack at this. Couple things jumped out to me. Largely investors already own the debt, it’s not just floating in the void. In your example, the company has a open bid and acquires debt as investors look to sell instead of holding. This makes sense if you actually are looking to pay down debt, most companies should be borrowing money for a reason, not just chucking it on their balance sheet. Additionally, a company who’s debt is trading at a deep discount (in order to justify buying it) is usually under some cash flow pressure that would result in an inability to actually spend that kind of dough. Finally companies do this at times (particularly in the high yield space). A company that has free cash flow and is concerned about either it’s ability to refinance or pay down the debt may pursue this. However, investors aren’t total idiots, if a company has a ton of cash they cannot be coerced to sell debt below par and so they just hold it and wait to get taken out at that point.
if I remember rightly, this happens in the 'caesars palace' book
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