By Karen Brettell - Analysis
NEW YORK (Reuters) - Plunging corporate debt values have radically increased the cost for companies to sell new debt. For some, it has also provided the opportunity to make some savings by buying back their debt at depressed prices.
Morgan Stanley (MS.N), for example, said last Wednesday it earned $2.1 billion in the fourth quarter by repurchasing $12.3 billion of its debt in the open market.
The move follows debt buybacks by a number of high-yield companies, including privately owned Freescale Semiconductor Holdings and Travelport Ltd.
First Data Corp, specialty chemicals company GenTek Inc GETI.O, trucking company YRC Worldwide Inc (YRCW.O) and building products maker Weyerhaeuser Co (WY.N), are also among companies to make below par debt tender offers in the past few months.
“This may represent a historical opportunity for companies to shore up their credit standing and limit the amount of negative ratings migration that I think we’re inevitably facing over the next six months,” said John Atkins, analyst at IDEAGlobal in New York.
“If somebody does not need to refinance and has the wherewithal to retire debt at 30 cents on the dollar, I can’t imaging too many treasurers who would not find that an enviable position to be in”, he said.
Corporate borrowing costs have soared across the board in the past few months as banks and other lenders pull back on their exposures and try to hoard cash.
For companies low on cash and facing debt maturities, the credit freeze has severely impaired their ability to refinance. Those with spare cash, however, can take advantage of low prices to retire debt at much cheaper prices than if they pay back par at maturity.
Companies can buy back the debt in the public market, or through a debt tender.
“The most likely candidates for debt tenders are over-levered, private equity-backed companies that still have access to cash, whether through revolvers or cash on the balance sheet,” said Brad Rogoff, credit strategist at Barclays Capital in New York.
Companies are focusing on nearer term debt to pay down first.
First Data offered to pay as much as 87 cents on the dollar to buy back debt maturing in 2009, to as little as 35 cents for debt maturing in 2015.
YRC offered to buy back up to $100 million of contingent convertible senior debt for between 37 and 62 cents on the dollar and GenTek in November said it bought back $13.7 million of first lien loans for 86 cents on the dollar.
Weyerhaeuser offered in November to buy back up to $700 million in debt, offering 97 cents on the dollar for debt maturing in 2009 and 82 to 88 cents for debt maturing in 2012.
“To the extent that there are companies that have cash, it is an excellent time to buy back the debt,” said Kerry Stein, head of distressed debt at agency broker JonesTrading in New York.
This is especially the case for companies with positive cash flows and that have debt trading at around 60 or 70 cents on the dollar, he said.
“You take some debt of your balance sheet and you also save yourself theoretically a decent amount of money in retiring it at these levels,” Stein added.
Banks like Morgan Stanley, which has received money from the U.S. Treasury’s Troubled Asset Relief Program (TARP) may find buying back their debt to be controversial, however, given that the government funds were meant to encourage lending, said IDEAGlobal’s Atkins.
“This is a use of capital that I don’t think a lot of scolds on the critical side of federal intervention would like to see happening,” he said. “It could be controversial in the wake of the TARP allocations.”
Reporting by Karen Brettell;