Structuring bond buy-backs in declining markets
Fear of the Corona virus and a plummeting oil price has sent stock markets down and the credit spreads are widening significantly. With investors in sell-off mode issuers can buy back bonds at more attractive spreads, but buy-backs of listed bonds should take into account securities trading regulations and be structured properly.
Broadly speaking buy-backs can be done by the issuer trading in the market alongside other buyers or by the issuer launching a public tender offer where investors are encouraged to tender their bonds for sale to the issuer. Different structural and legal issues should be considered.
Trading without a public tender offer
First of all, issuers should make sure that they are not in possession of price sensitive information when trading in own bonds, as this could be a breach of the insider trading rules. Buy-backs will therefore need to be coordinated with publication of financial statements and handling of any other potential inside information.
If buy-backs can be made clear of the insider trading prohibitions, issuers still need to take into account market manipulation regulations and equal treatment obligations, with the latter being the most difficult to apply in practice.
Pursuant to section 5-14 of the Norwegian Securities Trading Act, issuers shall treat investors in their bonds equally and only differentiate between them based on just cause ("saklig grunn") in the mutual interests of the issuer and the investors. In practice, the question is to what extent issuers may acquire bonds in the market without launching a public buy-back offer allowing all interested investors to participate.
Unfortunately there is no clear guidance or fixed threshold for this. In 2012 the Oslo Stock Exchange launched a proposed recommendation on the subject, which stated that buy-backs of more than 20% of outstanding volume on a 12 months trailing basis should be launched as public tender offers. This recommendation was, however, never formally issued and was probably not sufficiently nuanced in relation to the equal treatment obligations. For instance, while it can be acceptable for an issuer to gradually pick available bonds in the market up to this level, issuers should not acquire this volume in one go from one investor. Furthermore, issuers should be more cautious when markets are in sell-off mode with investors seeking an exit, if the issuer buys bonds at different spread levels and when the buy-backs have been initiated by the issuer itself (as opposed to investors or brokers). Buy-backs of significant volumes in such situations should be considered launched as public tender offers. This is also consistent with the current recommendation from the Oslo Stock Exchange.
If the issuer trades in the market outside of public tender offers, there is an obligation to notify the market of significant changes in the issuer's own holding of bonds. Again it is unclear what constitutes a "significant change". The markets have for many years practiced a 10% threshold, however, there is no legal basis for this threshold. The Oslo Stock Exchange's guidance on public disclosures states that a case by case assessment is required and they recommend that large trades or trades that deviate from existing trading patterns of the issuer are made public. Multiple trades are aggregated when making this assessment. As such, while it may be prudent to stay with the 10% threshold in specific cases, we would recommend to issuers who have previously not been actively trading or who come across significant volumes in a short time span, to have a lower threshold for public disclosures.
Public disclosures should be made immediately after the trade is done and is recommended to at least contain volume, date of trade, spread and volume held after the buy-back.
Public tender offers
Public tender offers should be structured properly to take into account insider trading prohibitions and equal treatment obligations. This means that the offer will have to be open for a sufficiently long time for all interested investors to partake, allocation principles need to be transparent and treat investors equally, and the pricing must treat investors equally. As a general statement, issuers are free to offer any buy-back price they want, so long as it is offered to all investors, but a reverse auction is clearly the most widely used structure. We have seen some market participants questioning whether the equal treatment obligation means that all investors need to be given the same price for their bonds, despite tendering at different spreads in a buy-back offer. It is our view that this is not required. Provided this is made sufficiently clear in the buy-back offer, the issuer is free to buy bonds at the tendered (lowest) price and move up in price as far as the total buy-back volume permits.
The issuer will need to notify the market of buy-back offers when launched and the result of the buy-back offer once completed.
For more questions about buy-backs of own bonds or shares, please reach out to our capital markets teams.