Debt Tender Offer

A debt tender offer is when a firm retires all or a portion of its debt securities by making an offer to its debtholders to repurchase a predetermined number of bonds at a specified price and during a set period of time. Firms may use a debt tender offer as a mechanism for capital restructuring or refinancing.

When a company issues debt, it receives a loan from investors who purchase the debt. To compensate these investors for the funds borrowed, the issuer will make interest or coupon payments to the debtholders. The interest payments, which are fixed, represent a cost of debt to the issuer. It is possible that interest rates in the economy will change during the life of the bond. When interest rates increase, the value of the existing bond 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 is by making a debt tender offer.

Companies which have previously issued debt have the option to restructure the debt on favorable terms. Corporate issuers turn to debt tender offers as a way to eliminate their highly leveraged and risky capital structures. A debt tender offer is an opportunity for a corporate issuer to retire its existing bonds at less than the original face value and to reduce its related interest costs. The company makes an offer to repurchase the debt securities from bondholders for cash or exchanges them for new 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 ratio. Doing so will give the company a greater margin of safety against bankruptcy since the company will be paying less interest. A company that does not have access to the cash necessary to issue a cash tender offer 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 in SEC Regulation 14E under the US Securities Exchange Act of 1934. Regulation 14E prohibits purchases and sales based on material, non-public information and 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. 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.

On October 6, 2016, Walmart commenced a cash tender offer to purchase for up to $8,500,000,000 of certain outstanding debt securities in an attempt to reduce its interest expense. The offer expired on November 3, 2017.