November 9, 2012 / 2:45 PM / 5 years ago

Corporates awash with cash to reignite LM fire

LONDON, Nov 9 (IFR) - Liability management activity in the European corporate arena is expected to pick up over the coming months as firms look for effective and efficient ways of putting cash to work and take advantage of super low yields.

Net cash on corporate balance sheets is currently at its highest level since the crisis, and on top of that, a divestment trend is sweeping through the market, suggesting that even more money could be flushed into treasurers’ coffers in the coming months.

At the same time, borrowing costs are still at rock-bottom levels, creating the most appealing conditions for corporates to buy back their own debt and issue new bonds at some of the most attractive levels this decade.

According to Bank of America Merrill Lynch data, the average spread of Triple B rated corporate bonds over government paper has narrowed by almost 100bp to 244bp over the past three months. The iTraxx Main index, meanwhile, has tightened by around 10% over the same period.

“Increasingly, as cash piles are growing, doing a liability management exercise on the back of a new transaction seems like the most sensible option for many corporates,” said Stephanie Sfakianos, head of debt restructuring at BNP Paribas.

“Especially considering low yields, investing in your own securities seems very wise,” she added.

Other restructuring officials also argue that the earnings season has highlighted that corporate fundamentals are far from being immune to global macroeconomic woes.

This has drawn corporates’ attention to the importance of bearing ratings defence options in mind, while also managing their liquidity wisely and extending debt maturities to mitigate refinancing risk where necessary.

Consensus is that liability management in the form of buying back debt is one of the best ways of bracing for the rocky road to come.


So far this year, approximately 20 corporates have successfully invited bondholders to tender notes for cash in order to solidify their debt profiles, according to a number of banks’ data.

That already matches last year’s full-year figure, and market insiders said that they expect a handful of deals at the very least still to come to the market this year.

Several bankers have said that they expect to see at least a couple over the next fortnight.

Dutch energy management company Alliander on Thursday announced that it was printing a new 10-year bond to fund the partial tender of shorter-dated, higher-coupon bonds.

Bankers have said that other potential candidates would be corporates in sectors where fundamentals have come under particular pressure during this earnings season.

That would include the technology and industrial sectors.

Corporates that have recently received cash injections through divestments and spin-offs could be lining up transactions too.

Carrefour, ArcelorMittal, Siemens and ThyssenKrupp are just some of the companies that have over the past month unveiled plans to spin off and sell assets to bolster liquidity.

In the periphery, Iberdrola has said that it plans to slash investment, sell assets and chop its workforce to reduce debt, while Telefonica has already proved its willingness to manage its liabilities to make the most of the market conditions.

Last week, the group announced that it was buying back preference shares worth some EUR2bn as a part of a series of measures to reduce its EUR58bn debt pile.


Asked about the perks of buying back bonds to extend maturity profiles, one corporate treasurer of a multinational company said that the benefits were blatant.

“If I was the treasurer of a company that had a lot of debt outstanding, a lot of cash on my balance sheet and a lot of maturities coming up, I would naturally look to the possibility of buying back shorter bonds,” he said, adding that sitting on heaps of cash that was returning virtually nothing was senseless.

“At the same time, however, I can understand why some groups would prefer to retain a healthy cash buffer,” he said.

“It would be very unfortunate to buy back a pile of debt just to find that you have to issue more debt in a few months to cover unexpected or one-off costs.”

A second treasurer of a large cap corporate said if liability management activity does pick up and a maturity extension trend gathers pace, the next logical step might be share buybacks and dividend hikes.

Bondholders however have said that corporates should be aware of the risks involved in doing this too soon.

If too much cash is returned to shareholders, jeopardising the company’s debt profile, ratings could come under pressure.

One investor said that the global economy has had plenty of false starts already and that patience was key to minimising the risk of being caught out too early.

“There’s still plenty of headline risk on the horizon and there’s no knowing what’s around the corner.” (Reporting By Josie Cox; editing by Philip Wright and Julian Baker)

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