U.S. companies buy back loans as prices plunge

Ford (F.N: Quote, Profile, Research, Stock Buzz) on Monday said a tender offer for its term loans, in which it is offering to pay 47 cents on the dollar, was oversubscribed. It doubled the cash available for the offer to $1 billion.

Casino operator Las Vegas Sands (LVS.N: Quote, Profile, Research, Stock Buzz) also said on Tuesday it was in talks with its lenders to amend terms in its debt so it could buy back up to $800 million in term loans, while car rental firm Hertz (HTZ.N: Quote, Profile, Research, Stock Buzz) said it was considering debt buybacks.

"The reduction in interest expense is very modest, but it's clearly deleveraging, and in certain instances, it may give you covenant relief." said Brad Rogoff, high yield credit strategist at Barclays Capital in New York.

Declining earnings are causing many companies to bump up against terms in their loan agreements that limit the amount of debt they can have relative to their earnings, or breach other credit ratios.

If companies break terms in the agreements, they need to renegotiate with their bank lenders, who typically reduce the amount of credit available and increase its cost in return for more flexibility.

The average bid price for the 100 most liquid leveraged loans has dropped to around 72 cents on the dollar, from 90 cents in September, before the failure of Lehman Brothers, according to LSTA/LPC Mark-to-Market Pricing Service.

Prices have, however, recovered from a low of 62.77 cents in December.

The low trading prices of loans is creating an opportunity for some companies with cash to also reduce marks they are required to make on their balance sheets against the debt.

For example, if Las Vegas Sands buys back its loans at 60 cents on the dollar, it would be able to pay down $800 million in loans that are marked on its balance sheet at par value with a payment of around $480 million, Barbara Cappaert, analyst at KDP Investment Advisors, said in a report.