{"id":28727,"date":"2012-04-03T11:14:48","date_gmt":"2012-04-03T15:14:48","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/04\/tender-offers-take-the-money-and-run\/"},"modified":"2012-04-03T11:14:48","modified_gmt":"2012-04-03T15:14:48","slug":"tender-offers-take-the-money-and-run","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/04\/03\/tender-offers-take-the-money-and-run\/","title":{"rendered":"Tender Offers: Take the Money and Run"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

\"Tender<\/p>\n

Tenders and calls are one of the best ways to beat this market. If someone is willing to pay you more than they have to, take the money and run.<\/p>\n<\/div>\n

It isn\u2019t often someone pays you more than they\u2019re legally obligated to pay. But that\u2019s exactly what\u2019s happening more and more often in this bond market.<\/p>\n

It\u2019s called a \u201ctender offer,\u201d and since interest rates have dropped to record lows there have been a growing number of them, and they\u2019ve worked out very nicely for the bondholders. They\u2019re also one way to beat both the stock and bond market.<\/p>\n

Here\u2019s how a tender offer works.<\/p>\n

Whenever a bond is issued, in this case a corporate bond, the company usually builds in safety valves for future use. These are used to save the company money on their debt obligations. These safety valves are called \u201ccall dates.\u201d<\/p>\n

Not to be confused with call options, bond calls are set dates when the company has the right to buy back a bond. These dates are always before maturity, at a set price, usually at a premium over par, and greater than $1,000 per bond.<\/p>\n

In our current interest rate environment<\/a>, lots of bonds are being called. It just makes sense to reissue or refinance a bond that was issued at a higher interest rate. The owner makes money and the company saves a ton of money on interest when they refinance at the current historic low rates.<\/p>\n

Sometimes bond owners don\u2019t see them as such a good deal. They may have a high coupon bond called that they might not have wanted to lose. But I say, take the money and run, it may not be there tomorrow.<\/p>\n

\u201cFree Money\u201d<\/strong><\/h2>\n

Never complain if someone is giving you free money.<\/p>\n

Not all bonds have call dates, but in this rate environment, all bond issuers wish they did. So, when a company wants to get their high-cost bonds off the market and they can\u2019t call them, they make a special tender offer \u2013 which is usually a really<\/em> good offer \u2013 to buy back their bonds.<\/p>\n

Sometimes it\u2019s a great deal, sometimes it\u2019s just ok. A lot depends on how much you paid for the bond. This is one of the many instances where my \u201cbuy at a discount\u201d discipline comes in very handy.<\/p>\n

The higher the coupon of the bond, the bigger the tender offer has to be to get owners of the bonds to sell them to the issuer. It\u2019s just a matter of numbers; it costs more to buy back an 8% coupon bond before maturity than a 4% or 5% bond.<\/p>\n

A Recent Example<\/strong><\/h2>\n

Here\u2019s a bond I recommended last year that has a current tender offer:<\/p>\n

Cenveo<\/strong> \u2013 We bought it for around 98 in June of last year. This was one of those \u201cpucker bonds.\u201d It isn\u2019t a well-known company, and for the average stock head, it wasn\u2019t the best fit because it\u2019s privately owned, and that sends up red flags all over the place for stock jockeys. They don\u2019t trust companies that aren\u2019t listed on the exchanges.<\/p>\n

But bonds from privately owned companies pay more then public companies\u2019 bonds and are just fine. More at another time on why privately owned companies\u2019 bonds are good deals.<\/p>\n

Our minimum expected annual return (MEAR) when we purchased the bond was around 9.46%. Not a huge return, but very respectable. But if the holders accept the current tender offer of 111, $1,110 per bond, they\u2019ll make out like bandits.<\/p>\n

We paid around 98 for the bond, $980, so just in capital gains we get $130 per bond, or 13.26%, in about nine months, plus our interest of 7.875%.<\/p>\n

Oh, and accrued interest. I don\u2019t usually talk about AI as it can be very confusing for the uninitiated, but in this case, it\u2019s important.<\/p>\n

When you own a dividend stock<\/a>, you must own it on the ex-dividend date or you don\u2019t get paid any interest for the preceding quarter. But with a bond, you\u2019re paid from the moment the bond shows up in your account until it matures, you sell it, or in this case until the tender offer is paid.<\/p>\n

So our real return was $130 in capital gains, plus an interest payment on December 1 of $39.37, plus AI for the period from December 1 to about April 1 in the amount of $26.35. (That\u2019s an estimate for a holding period of about 10 months which gives us an annual return of 23.96%: $39.37 + $26.25 + $130 \/ 980\/ 10 months x 12 = 23.96%.)<\/p>\n

In any comparison, that\u2019s a great return.<\/p>\n

Take the Money and Run<\/strong><\/h2>\n

Since interest rates dropped to their ridiculously low levels, tender offers have been coming out of the woodwork and bonds are being called and tendered at an unusually high rate. In almost all cases they\u2019ve been great deals for the bond holders.<\/p>\n

Still, many stockbrokers won\u2019t buy bonds<\/a> that can be called. They see the call as a negative. The same is true for tender offers. It\u2019s rare a stockbroker will advise their clients to accept a tender offer. They view it as a loss if they give up a high coupon bond.<\/p>\n

But, that\u2019s why they\u2019re called stockbrokers and not bond brokers. They have a much greater understanding of stocks than bonds.<\/p>\n

Tenders and calls are one of the best ways to beat this market<\/a>. If someone is willing to pay you more than they have to, take the money and run.<\/p>\n

Good Investing,<\/p>\n

Steve McDonald<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U Tenders and calls are one of the best ways to beat this market. If someone is willing to pay you more than they have to, take the money and run. It isn\u2019t often someone pays you more than they\u2019re legally obligated to pay. But that\u2019s exactly what\u2019s happening more and more … <\/p>\n

Continue reading “Tender Offers: Take the Money and Run”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-28727","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/28727","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=28727"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/28727\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=28727"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=28727"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=28727"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}