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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 may use a debt tender offer as a mechanism for capital restructuring or refinancing. It is similar to an equity tender offer, where a firm solicits shareholders to repurchase the company's stock.
When a company issues debt such as bonds, it receives a capital loan from the investors who purchase it. To compensate these creditors for funds borrowed, the issuer will typically make regular interest or coupon payments to the debt holders 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. It is possible that 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. Similarly, 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 turn to debt tender offers as a way to eliminate or reduce overly leveraged, risky, or high-cost capital structures.
Although 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.
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.
When a corporate issuer makes a cash tender offer, it makes a public offer to purchase some or all of its outstanding debt securities. A highly leveraged firm may wish to use its retained earnings to buy back bonds in order 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 typically purchased, retired, and canceled by the issuing company, and will no longer remain outstanding obligations on the financial statements.
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 usually be more favorable to the issuing company.
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 also requires that the tender offer be kept open for a minimum of 20 business days from commencement and 10 business days from notice of a change in the percentage of securities sought, consideration offered, or a dealer’s soliciting fee.
The debt tender offer only stands for a limited time. In addition, the offer to purchase the bonds is set at a price above the current market value but below the face value of the bonds. Since only a minimum amount of the bond repurchase is allowed, the investors cannot negotiate the terms of the debt tender offer.
On June 13, 2022, Ford (F) initiated a cash debt tender offer to purchase up to $2.5 billion of certain outstanding debt securities in an attempt to reduce its overall interest expense. The offer expired on June 17, 2022.