What Factors Are Fundamental in Bonds Repurchase

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What Factors Are Fundamental in Bonds Repurchase

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1. What factors are fundamental in bonds repurchase / buyback ? In managing debt, bond can be reduced through repayment or redemption bonds that prior to maturity, through repurchases. Basically buying back bonds necessary for the following purposes: 1. Improving the maturity structure of bond principal. 2. Reduce the bonds that have a higher cost of borrowings, thus lowering the overall cost of borrowings. 3. Maintaining the stability of bond prices in the secondary market. In addition to the above objectives, bond repurchase as well as portfolio management, especially sovereign bond portfolio, which must be done efficiently by practices generally accepted in many countries. In another explanation, bond repurchase should be done with a purpose divide the burden of interest and principal payments from one year to the next. Thus issuers need to do it because to keep in budget ability to pay and the market for refinancing absorption. Thus buyback aimed at reducing the number of short-term bonds (maturity). In sovereign bond portfolio management, the program is expected to strengthen market confidence in the government's fiscal policy. In common, issuers of bonds may take advantage of one aspect of this gloomy market. Many high yield bonds are trading at substantial discounts to par, providing an opportunity for issuers to repurchase their bonds in the open market or in privately negotiated transactions at favorable prices. Such an opportunity allows issuers to de-leverage and reduce future refinancing risk. Factors to be consider when bonds repurchase. In bonds repurchase will include active solicitations or negotiations to purchase bonds, companies and their affiliates consider the following factors in designing and implementing their bond repurchases: 1. 2. Timing. The repurchases should be made over a meaningful period of time. The longer of period will be better. There should be no set time period or deadline. Number of Solicited Sellers. Solicitations should be made to a limited number of potential sellers. The fewer number of holders contacted, the greater the probability that the offers to purchase will not be considered a tender offer. Variable Prices and Terms. Negotiated purchases from multiple sellers should be at different prices and on different terms. The greater the variation in price and terms, the greater the probability that the offers will not be considered a tender offer. Nature of Sellers. Privately negotiated purchases of securities from sophisticated institutional investors generally should not be deemed to constitute a tender offer, even if a significant percentage of the outstanding bonds is acquired. Character of Offer to Purchase. The purchaser should refrain from applying pressure to potential sellers to sell their bonds, such as “take it or leave it” offers, offers conditioned on other purchases or offers open for very short periods before being rescinded.

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Tax Consequences A repurchase by a company of its debt at a discount will generally result in taxable income to the company in the form of cancellation of indebtedness income. The amount of this taxable income is generally the difference between the principal amount of the debt repurchased (or its accreted value, if applicable) and the repurchase price. Regulation Fair Disclosure If the issuer of the debt is Securities Exchange Commission (SEC) reporting company, it should consider its obligations under Regulation Fair Disclosure (FD) in connection with any privately negotiated repurchase of debt. Regulation Fair Disclosure prohibits disclosure of material nonpublic information about SEC-reporting companies to certain types of people unless a confidentiality agreement is in effect. In some circumstances, the fact that a company is seeking to repurchase its outstanding bonds or loans may itself be a material fact that triggers obligations under Regulation Fair Disclosure Companies should always consider Regulation Fair Disclosure before embarking on a debt repurchase program. In order to ensure compliance with Regulation Fair Disclosure, companies may elect to disclose their debt repurchase plans publicly before commencing repurchases. Equitable Subordination Affiliates considering purchasing the bonds or syndicated bank debt of related companies should consider whether they are putting themselves at risk of being equitably subordinated to other creditors in the event that the related company becomes insolvent. Equitable subordination is a principle under bankruptcy law that allows a court to subordinate a claim (in this case, the bonds or loans acquired by the related person) to other allowed claims and/or to release liens securing the claims of the related person Companies or affiliates planning a bond repurchase program should take care to design the program such that it does not constitute a tender offer. If a bond repurchase program is conducted so as to constitute a tender offer, it will be subject to certain requirements In general, a debt tender offer is a publicly made offer to bondholders to tender their bonds for sale at a specified price subject to specified conditions over a fixed period of time Additional Disclosure Issues Repurchase debt securities need to consider whether they are in possession of any material nonpublic information about the issuer prior to commencing any purchases of debt securities. Provision of the federal securities laws and existing policies and procedures of the various selfregulatory organizations impose disclosure responsibilities that appear to be sufficient to ensure that investors and the marketplace in general receive adequate information concerning the issuer purchases. This principle should apply equally to repurchases of debt securities by issuers and their affiliates

Prior to making any purchases of an issuer’s debt securities, the issuer (or the purchasing affiliate) must analyze whether it has material non-public information, such as unreleased earnings or financial results or an unannounced merger. The issuer must also consider whether implementation of a bond repurchase program is consistent with the issuer’s contractual obligations. The indenture governing the bonds being repurchased is unlikely to prohibit repurchases of the bonds issued under that indenture. However, if the issuer has any outstanding bank debt, the credit agreement may well prohibit repurchasing other debt, even unsecured debt, absent pre-negotiated baskets usable for this purpose 2. Which country do you deem the best in regulating for bonds repurchase/buyback? Why? From my opinion, the country which best regulating for bond repurchase is Germany. Several things that led Germany to implement different policies compared to other European countries: 1. Equal Treatment of Bondholders. For any bonds of an issuer for which the home member state is Germany, the German Securities Trading Act (implementing the EU Transparency Directive) provides for an obligation on the issuer to treat all holders of a class of securities equally. This applies to debt as well as equity securities and irrespective of the law governing the securities. In the context of a bond repurchase there are two main ways to comply with this rule. If the issuer purchases in the open market all bondholders are understood to have the same opportunity to sell into that market. Alternatively, the issuer can conduct the repurchase offer that is open to all bondholders. An exception where such “sweetening the deal” would be permissible is an incentive for an early tender as long as it is open to all bondholders 2. Public Disclosure Requirements. Germany has implemented the EU Market Abuse Directive and as outlined above, while the safe harbors provided thereunder are not directly applicable to debt securities, their prerequisites can provide guidance for issuers about the types of information the market may expect and the timing of their disclosure, although a more restrictive approach can be warranted in the specific situation. 3. Tax Consequences If the issuer repurchases bonds at less than their nominal value, German tax law assumes a profit of the issuer in the amount of the difference between the book value and the amount paid (including transaction cost). The repurchase of the debt through an affiliated German or foreign entity may avoid this tax burden. However, if such affiliate is a German one, it may generate a taxable profit when the debt is subsequently paid back in total When determining the cash available for a repurchase, the potential tax liability that might be triggered by such profits (depending, of course, on the overall earnings of the issuer) needs to be taken into account.

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