Ford Motor Co, Hertz Global Holdings and Las Vegas Sands Corp are among companies seeking to take advantage of low prices of their loans by buying back the debt, and potentially getting more breathing room in the debt's covenants.
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.
This would have a bigger impact than just keeping $500 million in cash on the books, she said. We think it is a prudent move and one, depending on price, that could be fairly successful.
Holders of senior loan debt, which is at the top of a company's capital structure, may also allow more junior loans to be bought back even though it would mean less cash backing their claims, said Adam Cohen, founder of research firm Covenant Review.
Generally, bank lenders should want to know they're going to be the first ones to be repaid inside bankruptcy or outside of bankruptcy, he said.
For some junior loans, which are trading at even more depressed prices, however, companies may be able to convince senior lenders that the benefits of buying back the loans will leave a stronger company, and in turn also be beneficial for them, Cohen said.
Whether loans are offered as part of any tender, however, may depend on the type of investor holding the loan.
Opportunistic investors who have bought loans at depressed prices will be willing to use the liquidity provided by the company to potentially sell -- less so for loans that have been held for a long period of time in a structured vehicle, said Barclays' Rogoff.
Structured deals known as Collateralized Loan Obligations, which were one of the largest drivers of demand for debt in recent years, would be unlikely to tender debt at a discount to the par value as it would add to losses in the loan portfolio.
Lenders who believe the loans will recover more than the company is offering in a potential bankruptcy may also be unlikely to tender the debt.
Loan holders will hold out if they think the value of the loan is higher than the offer, Rogoff said.
(Editing by Dan Grebler)