The Decision to Repurchase Debt

11 Pages Posted: 9 Jul 2014

See all articles by Timothy A. Kruse

Timothy A. Kruse

Xavier University - Department of Finance

Steven K. Todd

Loyola University of Chicago

Tom Nohel

Loyola University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: Spring 2014

Abstract

The authors examined the market reaction to announcements of 208 corporate offers to repurchase outstanding debt during the period 1989–1996. In most tender offers, debtholders receive either a fixed price or a fixed spread over a benchmark Treasury security, or a range of prices based on a Dutch Auction. In most cases, management cites as its main motive the desire to reduce leverage and/or interest expense. But such tender offers are also often—in fact, in 70% of cases—accompanied by consent payments intended to induce bondholders to vote to remove covenant restrictions. The authors found that tender offers are wealth‐increasing events, with positive average market reactions of almost 1.5%. But the means of funding has a major impact on the market reaction. Whereas tender offers financed with equity receive a neutral market response, those offers financed with the proceeds from asset sales are associated with equity announcement returns of 3.8%. What's more, shareholders respond positively to the removal of covenants, especially asset sale covenants, with abnormal returns averaging 11% in such cases. Before their offers, companies that tender for their debt tend to have less cash and more long‐term debt than comparable companies, and to have lower operating returns and to trade at a discount to their peers. But after the tender offer, assets increase, operating returns improve, and the tendering firms trade at a premium.

Suggested Citation

Kruse, Timothy A. and Todd, Steven K. and Nohel, Tom, The Decision to Repurchase Debt (Spring 2014). Journal of Applied Corporate Finance, Vol. 26, Issue 2, pp. 85-93, 2014, Available at SSRN: https://ssrn.com/abstract=2463911 or http://dx.doi.org/10.1111/jacf.12070

Timothy A. Kruse (Contact Author)

Xavier University - Department of Finance ( email )

United States

Steven K. Todd

Loyola University of Chicago ( email )

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Chicago, IL 60611
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Tom Nohel

Loyola University of Chicago ( email )

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Chicago, IL 60611
United States
312-915-7065 (Phone)
312-915-8508 (Fax)

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