Wednesday, February 4, 2009

Overview of Recent Secondary Market Bond Repurchases

In the past 2 months, while many investors were concerned that the bottom is falling out of the market, CFOs were busy buying back debt in the secondary market. Note that this is not buying back debt in formal registered exchanges, which due to prevailing distressed levels, would have been classified as distressed exchanges which usually are branded as events of defaults by rating agencies. So instead companies decided to buyback existing debt at substantial discounts, netting not only no rating agency attention but a potential upgrade down the line. No doubt many of these repurchases were done at the urging of investment bankers desperate for advisory fees, who would get around 1% on the amounts repurchased. And if they were not, here is some advice for Managing Directors and aspiring Vice Presidents with writers block: screen for investment grade and crossover bonds that have lots of cash and are trading in the 60/70s, and pitch a bond buyback to the company - you might at least have a reason to argue for a bonus at the end of 2009.

There have been at least $1 billion of secondary market bond buybacks in the past two months. Surprisingly, the bulk of notional repurchases occurred at BB rated Xilinx (total of $482 million) and BB- rated Sears (220 million), not at investment grade names. Buysiders who might have ventured to purchase bonds alongside management teams would have reaped a median real return of 10.4%, which translates into 148% annualized. Of course finding the right bond to (re)purchase is half the battle. Plus these numbers could be somewhat misleading due to the overall rise in bond prices over the past 1-2 months. The only sure benefactor from repurchases are the companies themselves which manage to lock in returns of 20% just by rearranging their balance sheets, and deleverage at a significant discount.

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