Many companies are using the tail end of the recession to buy back debt at large discounts to face value, thus reducing both interest costs and total debt outstanding. This deleveraging allows the companies to adjust its capital structure to a more balanced level.
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The recovery in investor confidence and easing of the credit crisis has made it more difficult for companies to do this as the price of many bonds formerly trading at distressed levels have jumped the last few months, but some companies still have the opportunity.
Beazer Homes (NYSE:BZH) bought back $115.5 million of senior notes at a price of $58.2 million, a discount close to 50%. Beazer Homes has many different issues outstanding, and CFO Allan P. Merrill said during the conference call that many different factors were considered before deciding which issue to buy. These include the interest rates and maturities on the bonds, the discount to par and the availability of sellers.
Hovnanian Enterprises Inc. (NYSE:HOV) was another homebuilder that bought debt back as part of a tender offer started several months ago. The company bought $578 million in face value debt at 39 cents on the dollar.
Profits in Buybacks
Companies buying back debt also see a profit boost due to the accounting treatment of the action. Beazer Homes reported a $52.4 million gain on elimination of debt on its income statement when it reported earnings in August. This is the difference between the price paid and the face value.
Real Estate Investment Trusts (REIT) are also getting into the act. Developers Diversified Realty (NYSE:DDR) is in the midst of a cash tender offer for several tranches of its bonds. They company is looking to pay anywhere from 80-99 cents on the dollar.
Other companies are buying its debt at a discount, but just extending the term by replacing a short-term instrument with one with a longer maturity. Viacom (NYSE:VIA.B) made an offer to buy back a debt issue maturing in 2011. The company plans on replacing it with a seven-year issue. Eight-seven percent of the holders of these notes accepted the offer, and will receive a premium to par for their bonds. (Learn about debt ratios and how to use them to assess a company's financial health, read Debt Reckoning.)
Some might see the companies buying debt at a discount to be the ultimate value investors, as they issued and received funds at par value, and then are buying the issues back when they are at trough values.
Buying back debt at a discount is a good strategy for a company that can afford it, as having the correct balance of debt and equity in its capital structure makes the company that much more attractive to investors.
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