Plunging Prices Allow Some US Companies To Buy Back Loans

April 12, 2009

With so many loans dropping their value in response to the markets, it should be surprising that some US companies are taking advantage of the plunging prices to buy back their loans. Companies like Ford Motor Company, Las Vegas Sands, and Hertz Global Holdings are just three who are working to negotiate new terms and provide more time to recover financially.

With a proposed tender offer for term loans, Ford was prepared to pay back 47 cents on the dollar. When it was suggested that the offer was oversubscribed, the car manufacturer double the available capital for the offer to $1 billion.

Major casino operator Las Vegas Sands was still in negotiations with its creditors to make changes to its debt terms in order to buy back an estimated $800 million in term loans. Meanwhile, rental car giant, Hertz Global Holdings was also considering a path to repurchasing its debt.

A serious problem for many companies is loan agreement terms. Often, it is facing certain terms in their loan agreements that place a cap on credit to earnings ratios, meaning that the company must not have more debt than a certain percentage of their annual earnings.

When these terms are violated by companies, renegotiation may be required between the lenders and the companies. The lender, unfortunately, may be forced to lower the amount of available credit. Costs may also rise to compensate.

With the trading prices of so many loans dropping, those companies that have working capital are presented with a unique opportunity to lower the marks they must log on their balance sheets against debt.

On thing that companies should note is that they should have realistic expectations about whether their loans may be offered as part of a tender. Ultimately, it may be a question of what sort of investor has a hold on the loan.

Of course, there may also be lenders who are convinced that their loans will make a better recovery through bankruptcy than by what the company has offered. This may influence them to deny the tendering of the debt.