Debt Tender Offer

What Is a Debt Tender Offer?

A debt tender offer is when a company retires all or a portion of its outstanding bonds or other debt securities. This is accomplished by making an offer to its debt-holders to repurchase a predetermined number of bonds at a specified price and during a set period of time.

Companies might use a debt tender offer as a mechanism for capital restructuring or refinancing. It is like an equity tender offer, where a firm solicits shareholders to repurchase the company's stock.

Understanding Debt Tender Offers

When a company issues debt, for example, bonds, it receives a capital loan from the investors who purchase it. To compensate these creditors for funds borrowed, the issuer will commonly make regular interest or coupon payments to the debtholders in addition to promising to repay the principal at the bond's maturity.

The interest payments, which are often fixed, represent a cost of debt to the issuer. Possible prevailing interest rates in the economy will change during the life of the bond. When interest rates increase the value of the existing bonds will decrease since the coupon rate will be lower than the prevailing interest rate. Additionally, when interest rates in the economy decrease, issuers will be stuck paying the higher coupon rates affixed to the bond, unless they restructure their debt securities.

One method of restructuring debt to take advantage of lower borrowing costs is by making a debt tender offer to bondholders. Put differently, corporate bond issuers go to debt tender offers as a method for eliminating or reduce overly leveraged, unsafe, or significant expense capital structures.

Albeit tender offers provide many benefits, there are some disadvantages. A tender offer can be an expensive and time-consuming process as depository banks verify tendered bonds and issue payments on behalf of the creditors.

Types of Debt Tender Offers

A debt tender offer is an opportunity for a corporate issuer to retire its existing bonds at less than the original face value and, consequently, reduce its related interest costs. In this case, the company makes an offer to repurchase all or part of the debt securities it has outstanding from bondholders in return for cash or by exchanging them for newly issued debt securities.

Cash Tender Offer

All when a corporate issuer makes a cash tender offer, it makes a public offer to purchase some or its outstanding debt securities. A profoundly leveraged firm might wish to use its retained earnings to buy back bonds to lower its debt-to-equity (D/E) ratio. Doing so will give the company a greater margin of safety against bankruptcy since the company will be paying less interest.

Securities accepted in the tender offer are regularly purchased, retired, and canceled by the responsible company, and will never again remain outstanding obligations on the financial statements.

Debt Exchange Offer

A company that does not have access to the cash necessary to issue a cash tender offer, meanwhile, can make an offer to holders of its outstanding debt securities, agreeing to exchange newly issued debt for the outstanding debt securities. The terms of the newly issued debt will normally be more favorable to the responsible company.

Debt Tender Offer Requirements

Debt tender and exchange offers for straight debt securities are subject to the tender offer rules outlined in the Securities and Exchange Commission's (SEC) Regulation 14E under the U.S. Securities Exchange Act of 1934.

Regulation 14E prohibits purchases and sales based on material, non-public information. It likewise requires that the tender offer be kept open for at least 20 business days from commencement and 10 business days from notice of a change in the percentage of securities looked for, consideration offered, or a dealer's requesting fee.

The debt tender offer just stands temporarily. In addition, the offer to purchase the bonds is set at a price above the current market value yet below the face value of the bonds. Since just a base amount of the bond repurchase is allowed, the investors can't negotiate the terms of the debt tender offer.

Example of a Debt Tender Offer

On Oct. 6, 2016, Walmart Inc. (WMT) initiated a cash debt tender offer to purchase up to $8,500,000,000 of certain outstanding debt securities trying to reduce its overall interest expense. The offer expired on November 3, 2017.

Features

• Companies will consider a debt tender offer when interest rates fall, making the cost of borrowing cheaper than keeping up with older bonds at higher fixed coupons.
• A debt tender offer is a public solicitation to a company's bondholders requesting that they sell back their bonds or debt securities at a specific price and during a certain timeframe.
• The tender offer might be made in cash or by exchanging old bonds for newly issued debt securities of equivalent value.