US corporates are seeing good deals in their own debt right now. This is because many are quietly buying back their bonds in the open market for prices well below par, ie. what they sold the bonds to investors for.
If these companies turn out right, then they could be getting some real steals in the market.
For example, Hexion Specialty Chemicals, owned by private equity firm Apollo Management, recently bought back their debt for as little as 22 cents on the dollar. Struggling Beazer Homes (BZH) bought their debt for 50 cents on the dollar. Compared to paying 100 cents at maturity, these are some stellar returns on capital if the companies have the cash on hand.
Overall this is good news for credit markets. Investors who don’t sell are likely to see their bonds rally and it’s reassuring to see struggling companies more confident in using their cash.
Still, when it comes to private equity-controlled companies, such as Hexion, debt buy backs appear to present a conflict of interest. If a company wants to buy back their debt, they surely don’t want to talk up their liquidity situation beforehand. In fact, a little added gloom might actually make their debt cheaper. We’re not accusing any company of doing this, but it can happen at some level.
“No one wants to announce a bond or loan buyback until they have to, as that will move prices,” said Tom Newberry, head of leveraged finance at Credit Suisse in New York. “Those firms that can do this quietly and under the radar screen can buy more cheaply and chip away at their maturities.”
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