Actionable Ideas for Companies and Sponsors
Discount Exchange Offers as a Delevering Strategy
Companies with multiple tiers of debt trading at a discount to face often look at ways to repurchase the debt at lower market levels and thereby capture the discount in order to deleverage and book accounting gains. Typically, however, these companies lack ready access to new capital to fund potentially attractive debt buybacks. In these situations there is an opportunity for companies with long-dated or unsecured debt to exchange the debt into instruments with collateral, guarantees, shorter maturities or other enhancements to induce holders to complete the exchange with little or no upfront cash. These situations are often most effective when the issuer faces uncertainty as to its ability to repay longer-dated debt or when the capital structure implies significant downside for junior or unsecured creditors in the event of a reorganization. In these circumstances, bondholders typically value their existing debt on a yield-to-workout basis—in other words, they are estimating a future reorganized value, applying the cap structures order of absolute payment priority and then estimating the recovery to their class.
The ability to execute these deals is driven by many factors, including bond trading levels and overall capital structure, but most specifically the provisions of the various debt instruments of the company’s financings. Notable recent discounted debt exchanges include: Neiman Marcus ($1.477 billion principal amount exchanged), Ultra Petroleum ($780 million principal amount exchanged), and Community Health Systems ($370 million principal amount exchanged).