This past week, the Government of Bahamas issued a “tender offer” for some of the notes it has issued. This means that the issuer offered to buy your bond back before its maturity. In a tender offer, the issuer usually offers a price slightly above market to incentivize holders to participate. The tender price may be higher or lower than what you paid. This article will walk you through what a bond tender is, why issuers use them, and how to evaluate whether you should tender your bonds.
Why Do Issuers Tender Bonds?
- Lower Interest Costs: If market interest rates have fallen since the bond was issued, a company may buy back its older, high-coupon debt and refinance at the prevailing lower rates.
- An effort to improve its Credit Profile: Reducing outstanding debt can strengthen balance sheets and credit ratings.
- Extending duration of its debt: Governments or companies may wish to use longer-dated financing to repay shorter dated or upcoming maturities. This may help smooth out repayment schedules. It may also be timed to allow the issuer to take advantage of prevailing market conditions / investor appetite for longer dated notes.
Should You Tender Your Bonds? A 4-Part Evaluation
When you receive a tender offer, here are four key factors to consider:
- The Capital Loss or Gain: Compare the tender offer price to your acquisition price. If you bought below the tender price, you may realize a capital loss. This should be compared to the accrued interest you have earned since acquisition in order to calculate a total return. You could still have a positive total return even if the tender price is below where you purchased it. If the tender price is above your purchase price, then there are other questions you should consider:
- Breakeven yield: What is the return you would have to earn on a new security to give you the same yield and price appreciation (or alternatively compensate you for any capital losses). Are there securities that can offer you the breakeven yield for the same level of risk?
- Can I replace the income and yield for the same risk level? If you tender your bonds, you lose the future coupon stream. Consider the difficulty of replacing that income in today’s market. High-coupon, legacy bonds are often hard to replace with instruments of similar quality and yield. Can I find a similarly rated bond offering comparable yield and maturity?
- Credit Outlook of the Issuer: Consider the current and projected creditworthiness of the issuer. If the issuer’s financial position is weakening, a tender offer may be part of a defensive move to manage debt, raising the risk of holding the bond to maturity. On the other hand, if the outlook is stable and the tender is driven by opportunistic refinancing, you might prefer to hold. Ask: Is this issuer getting stronger—or signaling stress?
Bottom Line
Tender offers require thoughtful analysis. They’re not automatically good or bad, they’re context specific. Ask yourself: Am I improving my position by tendering? Or am I better off holding a reliable income stream in a changing market? Look at capital return, income impact, reinvestment options, and issuer credit quality to make an informed decision.
When in doubt, consult your advisor or investment committee with your analysis in hand. Smart fixed income investing often means thinking two steps ahead even when the issuer wants to take one step back.
Marian Ross-Ammar is Vice President, Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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