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Flush companies set to exchange new debt for old

Source: Reuters - Fri 6th Nov 2009

European companies have sold record volumes of debt this year but the market is currently so attractive that those with no pressing need for cash are using the opportunity to improve their debt profiles.

Bankers say healthy firms will increasingly seek to buy back debt and issue new longer-term paper debt via bond exchanges.

These liability management exercises currently allow borrowers to extend the maturity of their debt at relatively little cost.

British American Tobacco has said it plans to buy back bonds from investors and issue new debt, while Swedish holding company Investor AB is meeting bondholders for a similar exercise.

"We will see more liability management trades" said Mark Lewellen, European head of corporate debt capital markets at Barclays Capital. "Borrowers want to take advantage of the market right now and this is a way for them to do it even if they do not need the funding."


Most European corporations that had needed to issue debt this year have already done so, and in record numbers. According to Thomson Reuters, Europe' companies have sold 275 billion euros (246 billion pounds), 45 percent up on the previous record year in 2001.

While most high investment-grade companies recognise the strength of investor demand, few have need for the funds. 

But some borrowers are reluctant to miss out on being able to issue bonds with historically low coupons and extending their maturity profiles inexpensively.

That is why bankers say liability management transations can make sense. "We are back to the traditional dynamics in liability management" said Stephanie Skakianos, global solutions, at BNP Paribas.

The rationale for conducting debt buy backs and exchanges has changed dramatically from earlier this year when bond prices were depressed.

Then, banks who had sufficient liquidity, bought back their bonds outright and booked accounting gains on the discount -- the difference between what they paid and the original value they were issued at.

Skakianos said because of the credit market rally most companies' bonds were trading above par, meaning there is a cost that companies have to bear when they buy their bonds.

But if new bonds are issued in exchange, they may under IFRS accounting standards be eligble for "exchange accounting treatment", which allows the buy-back premium to be amortised.

One problem facing companies wanting to use spare cash to buy back bonds and issue fresh debt is the current mis-match between investor demand and corporate bond supply. Few investors are lining up to sell bonds, far from it.

For instance, Lewellen said the bond deal for TeliaSonera managed by Barclays Capital on Wednesday had an order book size of over 4.5 billion euros for a 600 million transaction.

Coverage ratios of this scale are far from infrequent and investors are wary of not receiving a decent allocation in any new issue. It is for this reason that BAT is using an allocation mechanism fairer to current holders of its debt who will receive priority allocation in the new notes sales. 

Bankers say anything above 45 percent of an oustanding bond bought back from investors is deemed a success. The company will issue new debt to finance this buyback and raise a little more to create a benchmark-sized deal.

More activity of this type could occur if new issue conditions remain firm although a widening in spreads could present a new set of opportunities.

"If we do see a correction, people will bite the bullet and just do straight buy backs. But in a bull credit market we'll see a lot of exchanges" said Sfakianos.

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