Buying back our debt

meditraitor

The Greeks are buying back there own debt(bonds) on the open market for far less than they would have to pay if they let it mature

http://www.nytimes.com/2011/01/20/business/global/20euro.html

Why are we not buying our own bonds on the open market? Irish bonds can be had pretty cheap now.......

Liam Byrne

Can we have a thread title correction?

Because it's not OUR debt.

drunkmonkey

When ever I got in debt I always got something for it, whether it be a new car etc.
What did we actually get for all the debt? What's the figure we all owe around 50k what did any of us get for it and when can we see it?

Unpossible

Ok, I'm having trouble understanding this stuff. I understood the article as:
The EU fund is going to buy greek bonds from bondholders for less than those bondholders would get if they were to go full term and were paid. The fund then sells these bonds to the greek government, as a result, instead of having to pay the full amount of bond price + full interest, they will instead have paid bond price + lower % of the interest.

Is that correct or did I miss something?

nesf

Unpossible wrote: »

Ok, I'm having trouble understanding this stuff. I understood the article as:
The EU fund is going to buy greek bonds from bondholders for less than those bondholders would get if they were to go full term and were paid. The fund then sells these bonds to the greek government, as a result, instead of having to pay the full amount of bond price + full interest, they will instead have paid bond price + lower % of the interest.

Is that correct or did I miss something?

Pretty much.

The price of a bond depends on two things, the capital repayment on the end and the interest payments till then discounted by the likelihood of default. So I've issued a bond for 100 quid that pays 5 quid every year for 10 years (a 5% interest rate). The face value of the bond is 150 quid on day one. Depending on whether I'm considered a very good or very bad creditor the bond will sell for more than or less than 150 quid depending on what kind of interest rate people are willing to receive for my bond.

So say my bonds are selling for 110 quid. The EUSF buys the bond for 110 quid and then asks me for 1 quid a year for the 10 years and 100 quid at the end (or whatever mix) meaning I pay less for my debt so I've more money to spend on other things like fixing my balance sheet etc.

beeftotheheels

meditraitor wrote: »

The Greeks are buying back there own debt(bonds) on the open market for far less than they would have to pay if they let it mature

http://www.nytimes.com/2011/01/20/business/global/20euro.html

Why are we not buying our own bonds on the open market? Irish bonds can be had pretty cheap now.......

The banks have been doing this http://www.independent.ie/business/irish/aib-seeks-capital-gain-of-euro13bn-in-debt-buyback-2495830.html

But it can be difficult because once the markets realize that debt is being retired (i.e. sold back to the issuer) below par in this manner they tend to hold out for a bit more.

Hence it is usually easier if a friendly third party can buy back the debt without having to disclose to the trustee for the bondholders that the transaction is a retirement rather than a simple on market purchase.

And then you need to be careful about the various market manipulation laws you could be subject to if the bonds are traded.

It certainly can be done, and looks like the banks are doing it, but it is complicated.

ei.sdraob

http://namawinelake.wordpress.com/2011/04/29/isn%E2%80%99t-it-time-the-ntma-started-buying-irish-bonds/

meditraitor

Would I correct in thinking its a civilised version of "burning the bondholders", sort of meeting half way with our liabilities.

I can see great scope for sharing the burden with a similiar scheme for our current debt, although I would like to see a the numbers....

How much of our debt is available for sale at reduced open market prices, what prices they can be bought for and who will give us a sub to buy it...

meditraitor

ei.sdraob wrote: »

http://namawinelake.wordpress.com/2011/04/29/isn%E2%80%99t-it-time-the-ntma-started-buying-irish-bonds/

Thanks man, some good info there...

beeftotheheels

meditraitor wrote: »

Would I correct in thinking its a civilised version of "burning the bondholders", sort of meeting half way with our liabilities.

I can see great scope for sharing the burden with a similiar scheme for our current debt, although I would like to see a the numbers....

How much of our debt is available for sale at reduced open market prices, what prices they can be bought for and who will give us a sub to buy it...

Yes it is, if you can do it.

This a simplified version of how it works with them.

X Plc has 1000 of bonds outstanding. 500 senior @4%, 300 junior @6.5% and 200 mezz @10%.

Senior is supposed to be the first paid back so is viewed as the lowest risk, and carries the lowest reward.

Now, we move to the world in September 2008 when the markets panicked and all bonds traded at a discount. The more risk the market perceived in the bonds, the greater the discount.

So X Plcs senior was trading at €0.80 in €1, junior at €0.60 in the €1, and mezz at €0.45 cents in the €1.

X Plc is sound (unlike our banks) and has 100 of cash. It figures why put the cash on deposit when it can buy back the debt at a discount and get a greater reward since in its view it is going to have to pay back all the debt at some stage anyway.

Normal rules, and what the trustee will want, require X Plc to pay back all the senior bondholders equally i.e. simply pay each of the senior bondholders back €0.20.

But you will not that from the above example if X Plc can use the 100 as it sees fit it will want to buy back all the expensive mezz for 90, and use the remaining 10 of cash to retire 17 of junior (being the next most expensive form of debt). 100 of cash could retire 217 of the most expensive debt at those prices. If particular sellers were distressed they might even sell back at a greater discount.

So this is why there is a legal minefield, because what the company will want to do to maximise its profit flies in the face of what the bondholders and trustee expect them to do with any cash.

It then tends to come down to the terms and conditions of the debt and whether the company can avoid doing what the trustee will want them to do.