A number of companies have clearly been taking advantage of the current liquidity crisis. But are they going so far as to be considered taking their investors for a ride?
These are mainly the companies that made extremely good use of the previous economic boom by issuing junk bonds like crazy.
If my theory is correct, these same companies are now using the global financial crisis as an excuse to push their own corporate bond prices even lower so that they can repurchase the bonds from jittery investors at below par value.
What do they have to gain? Junk bonds typically have very high interest rates. Plus, the issue price is sometimes below face value, which makes the yield on these bonds even more attractive to investors. However, for the company issuing the bonds, they could turn out to be a very expensive mistake.
With the economic downturn, assets are being broadly deleveraged, driving prices down quickly and drastically. Junk bonds are no exception. If the issuer can repurchase these junk bonds on the secondary market at a fraction of their original cost, then this translates to substantial cost savings in interest payments. Moreover, they have the option to then sell these bonds out onto the market once the economy recovers.
Amongst the guilty companies:
1. Metaldyne, which launched a bond tender attempting to buy out senior bondholders at $0.27018 on the dollar
2. E*Trade, which is issuing 25 million shares of common stock in an effort to retire $450 million worth of subordinated notes
3. ION Media Networks, which has been deferring the interest payments on their 2013 senior subordinated series A notes (CUSIP 46205AAB9) for about a century. This bond issue actually dropped down to $0.06 on the dollar recently.
If only the bond market had a Carl Icahn…
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