Savvy companies eye bond buybacks to book gains

LONDON, Aug 23 (IFR) - Corporates with ample liquidity could try to take advantage of a sharp fall in the price of their bonds to buy them back and book a gain, especially if debt covenants are restrictive and the interest payments are relatively high.

South African retailer Edcon, rated B- by Standard & Poor's, said on Tuesday it had made a capital gain of around 36 million rand (USD4.9m) by buying its bonds back cheaply in May following a broad-based sell-off in high-yield.

The group, which is owned by private-equity firm Bain Capital, repurchased a portion of its senior secured floating rate notes maturing in 2014. It paid EUR35m for the outstanding debt, which had a nominal value of EUR39m, after the bonds fell to around 90% of face value, the company said in a statement as it reported quarterly results.

Since then, the bonds have fallen to around low-to-mid 70 cents as the Eurozone debt crisis has intensified. Fears about a global recession have also increased, sending cash bonds on a spiralling downward trend and credit derivative indexes to two-year wides.

The mostly-speculative Markit iTraxx Crossover index has widened 280bp in the past month to 735bp, and was trading at half that level around 350bp at the start of May, according to Markit data.

"It was a clever thing to have done in May, but if the company had left it until August, it could have made even more money," said one high-yield investor.

Companies do not have to disclose whether they have booked such capital gains until they release results, another high-yield investor said, so it may take some time to see if this is an increasing trend.

Buybacks were last prevalent in late 2007 and early 2008 during the financial markets crisis. The latest sell-off in bonds, which has been particularly aggressive in high-yield, has been indiscriminate as some selling has been concentrated in the most liquid, and often better quality, credits.

Even sectors with relatively stable cash flows such as cable, which is considered less vulnerable to any deterioration in consumer spending, have also been hit quite hard. Cable company UPC's 8.375% bonds are bid at 91, for example, while sector rival Ziggo's 6.125% bond is bid at 95, according to Tradeweb.

One high-yield syndicate banker told IFR earlier this month that his bank had helped one corporate to buy-back approximately EUR20m of its own bonds at distressed levels.

"If you're a corporate and you've got cash, what you should be doing is buying your bonds back and cancelling them," the banker said at the time.

Some investors are also considering approaching companies directly to negotiate the price on potential bond buybacks somewhere between where the bonds are trading and par value. Some investors would be willing to lose a relatively high coupon payment if they expect the bonds to weaken further.

"It all depends on the company's liquidity position at the time, and whether the bonds are still considered to be cheap funding for them," said the first investor.

"If they need to refinance that debt, the company would have to consider whether it can access the market at a more beneficial rate. In this kind of market, that is pretty questionable."

Edcon used some of the proceeds from a well-received EUR475m-equivalent dual-tranche 9.5% bond, launched back in February, to repay some of the same floating rate bond it has just bought back.

Goldman Sachs was left lead on the deal and a global co-ordinator along with Deutsche Bank while Barclays Capital and Morgan Stanley were bookrunners.

($1 = 7.214 South African Rand) (Reporting by Natalie Harrison, IFR Markets, editing by Helene Durand)