A bond tender offer, also known as a debt tender offer, is a term used in corporate finance to denote the process of a company retiring its debt. It is done by making an offer to the company’s existing bondholders to repurchase a specified number of bonds at a particular price and a specified time.
Companies use such offers to restructure or refinance their current capital structure. Capital structure primarily includes the debt to equity ratio or leverage of a company.
A highly levered company is one with a large amount of debt relative to its equity share capital and vice versa. Once the buyback is offered to all the shareholders of the publicly traded company, the bonds that are given up by the shareholders are retired and canceled.
A bond tender offer is a process used by companies to retire their existing debt and change their capital structure.
Bond tenders decrease a company’s existing liabilities and cost of capital without necessarily pressurizing the liquidity situation of the company.
Tender offers can represent the threat of a hostile takeover of a company by external actors, such as private equity firms.
What is a Bond?
A bond is a unit of debt that is offered by a company to its debt holders in exchange for funds at a fixed rate of interest. It is a fixed income instrument that comes with a maturity date.
If the principal amount is not paid back by the maturity date, the debtor risks default. The interest rate payable on bonds, called the coupon rate, is pegged to the free market via Treasury interest rates. Both share an inverse correlation, which means that as interest rates rise, bond prices fall.
Advantages of Bond Tender Offers
Bond tender offers provide the following advantages:
1. Decreasing the cost of capital
The interest payments or coupon payments made to the bondholders represent a cost to the debtor company. For companies with a highly leveraged capital structure, it is favorable to eliminate or decrease the cost by repurchasing debt.
Debt repurchases are extremely important in cases when central banks turn dovish and market interest rates fall. The coupon rate increases and imposes a larger liability on the issuer of the bond. A company is also less likely to become bankrupt as a result of fewer payment obligations.
2. Retiring existing bonds at less than face value
On the open market, many debt securities trade below their face value, thus making the repurchasing of a debt attractive to a company. In the case of a bond tender offer, the company offers to buy its bonds above their market value.
However, the company’s offer price is still lower than the face value of the bonds. The transactions are generally non-negotiable with the offeree since only a limited amount of bond purchases are permissible by financial markets regulators.
3. Does not affect the company’s liquidity
Any company can either repurchase bonds in exchange for either cash or issue a new security to the bondholders. Thus, companies with access to capital can use their retained earnings to make an offer. Companies without access to capital can exchange outstanding securities for freshly issued debt.
Disadvantages of Bond Tender Offers
1. Threat of hostile takeovers
According to the US Securities and Exchange Commission (SEC), tender offers for the buyback of any security can be made without the consent of the members of a company’s board of directors. Such offers can represent the threat of a hostile takeover. It is because the shares purchased by means of a tender offer become the property of the buyer.
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