Actionable Ideas for Companies and Sponsors
Discount Exchange Offers can be an Effective Deleveraging Strategy
Companies with multiple tiers of debt trading at a discount to par often examine ways to repurchase the debt to capture a discount; thereby deleveraging their balance sheet.
Typically, however, these companies lack ready access to capital to fund debt buybacks. In these situations, there may be an opportunity for long-dated maturity or unsecured bondholders to exchange their debt into instruments with collateral, guarantees, shorter maturities or other enhancements to induce holders to participate in the exchange.
A contemplated discount exchange is often most effective when the issuer faces future uncertainty as to its ability to repay longer dated debt or the capital structure implies significant downside for junior or unsecured creditors in the event of a bankruptcy. In these circumstances, bondholders typically value their existing debt on a yield to workout basis; more specifically, investors estimate a future reorg value, applying the cap structure in order of payment priority and then estimating the recovery to their class. To the extent there is further downside, bondholders may act defensively, allowing issuers to exchange bonds, at a discount, with features (i.e., collateral) that provide downside protection in a reorganization in exchange for existing debt and, in doing so, incrementally reduce debt with little or no upfront cash.