corporate finance question
was having a discussion with friends on convertible bond buyback for class. let's say a company issued a convertible, but market thinks this company is no good, along with other companies in the same sector, and currently, the convertible bond is distressed, and trades at like 30 cents (normal time would be 1 buck)...so i think the easy choice is for the company to buy back the convertible bond, assuming it has the cash to do so... how do the company proceed to do so? since they need to come up a price that is between 30 cents and 1 buck..what methodology does investment bank come up to set the buyback offer price?
Reading your post actually hurt my brain.. WTF. Anywhooo to answer your question, I thought it was the sole responsibility of the Treasury depart to determine what price they would offer and how much they should buy back. I could be wrong so don't hold me to this
they make a tender offer, which is under the 30 cents... debt buyback never happen at above market prices... secondly, if it was distressed, a buyback wouldn't help it, it would in most cases keep the cash for operating purposes and seek an out of court restructuring...
Debt buybacks usually happen above market prices, not below. Companies usually offer up a sweetener to incentivize participation, say in the neighborhood of 3-5%. Why on earth would anyone sell their debt back to the company at prices below what they could get in the secondary market? That's absurd. There's no need for a tender offer if you're picking off small pockets of debt (
yes, i agree, but what if the company wants to buyback all its debt (in this case, the convertible bond issued couple years back)..it has to go with tender offer???
such company usually make a gain, as they borrow money, and if they buy back below their original price, they make money..
Debt buybacks usually happen above market prices, not below. Companies usually offer up a sweetener to incentivize participation, say in the neighborhood of 3-5%. Why on earth would anyone sell their debt back to the company at prices below what they could get in the secondary market? That's absurd. There's no need for a tender offer if you're picking off small pockets of debt (LBO buybacks and see what the market was trading at prior to buyback announcement? Then you can tell me I was right. When they entered distressed levels and the asset becomes illiquid on the secondary market, you'll cash out at any price as long as you don't take the complete loss to your books... Don't think about it from a investment grade perspective but instead from a distressed situation.
Now let's analyze it further, the convertible bond, would have to be senior at the point of the buyback since any bank debt wouldn't allow for the bond's buyback till it was paid in full. So now we assume that it deleveraged and is in financial trouble making it extremely illiquid as everyone wants to cash out and no-one, not even distressed guys want to buy this stuff as operationally, it has major issues.
So if a company can now offer people some type of cash instead of waiting on bankruptcy, why would a company pay a premium and waste money when it understands the situation at hand? It can rapidly take the illiquid asset off people's hands at cheaper rates than it's trading at... and whther you think its logic or not, that's the way the distressed buyback world works...
hmmm..the previous link i posted from bloomberg actually said the company gave a premium...at least, i know in Asia, market really think real estate stocks are sh.t and now they are trading like 2x-5x P/E (in better time, it's 15x-20x)...and bond all appeared to be distressed. It's not a single company problem, but the whole sector..so some companies have the ability to pay back the debt, even their convertible bond trades at a huge discount..so I am thinking, if the company announce a tender offer at market price, would some holders of convertible bond think that this company might actually be able to pay back, and refuse to trade in with market price? (assuming the holders of CB are not that hungry for cash)
appreciate ur opinion...
if the CB was trading that low then the investors value the stock value near 0 (and therefore no incentive to convert the option) and the debt around 30c in the dollar. a company in this situation is prob on the verge of insolvency and will have limited cash to buyback the cb.
plus if the board approved it knowing how fucked the firms finances were, they will probably get chased by the creditors.
actually, there are several such cases recently, at least in Asia market...(this is why i have this discussion with friends) ..to name an example, check this link
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4zH_.2Nb54c&refer=…
i think mainstreet...might be correct that treasury dept should come up with the price, but in Asia, many investment banks help do such thing...
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