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NP Italian Stallion

Total Posts: 2014
Joined: Mar 2004
Posted: 2017-05-22 22:05
Hi guys

total ignoramus question here: are there rules governing the buy back of debt by the entity that issued it in the first place?

Case in point: big drama unfolding at Noble Group, 1Q result they lost 100M, panic etc.. now on the verge of bankruptcy. Having said that, in March they sold 750M worth of bonds that now trade 40 cents on the dollar. If (theoretically) they bought it back now, they would scored a "gain" (so to speak, you get the idea) of 400M which dwarfs the trading loss that sent the investors in a flat spin, an obvious move to me provided that they still have 350M of liquidity to do that (as they should, given that the sale was only 2 months ago and the loss was only 100M).

What am I not understanding here?


Total Posts: 424
Joined: Apr 2005
Posted: 2017-05-22 22:08
They ain't got the liquidity?
(companies buy back their own debt all the time)

NP Italian Stallion

Total Posts: 2014
Joined: Mar 2004
Posted: 2017-05-22 22:31
That might be the case, maybe that 750M they raised was to cover some other debt obligation, I do not know the details to tell you the truth... still the trading loss seemed to be small compared to the effect it has had on the bonds, hence my thought.

Which also leads me to ask: companies that issue bonds mark this stuff in their balance sheet at market price or at par?


Total Posts: 341
Joined: Mar 2005
Posted: 2017-05-23 02:08
As part of a wider, funded restructuring small maybe hence trading at 40.000 cash price. That said (and I've not looked) that's not far off the rule of thumb recovery floor... Anyway if they get a funded restructure you wouldn't hit a 40 bid...

Salut toi, je vais au Social Club avec des amis ce soir, c'est au 142 rue Montmartre. J'ai mis ta robe préférée. Viens me trouver.


Total Posts: 206
Joined: May 2006
Posted: 2017-05-23 11:38
Welcome to the world of mark to market.

Companies book their debt at mark to market, so they can and do make big accounting gains just before they go bankrupt, because their liabilities are becoming worthless faster than their assets. But these are only accounting gains - you can't pass them on to the shareholders in any meaningful way.

Buying the debt back doesn't do anything for your valuation (you are just converting paper to cash at market price). It is mainly used for tax purposes. It sort of does reduce the duration on the liability side, but that's what swaps are for. I have never heard of that as a reason to buy back debt.

I don't know the specific situation at Noble. Presumably they feel that they need the liquidity to survive the short term. If they bought the debt back now, the market wouldn't be in any way reassured - who would buy their next issue, and why? - but then they also wouldn't have any liquidity to survive the short term.

"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh


Total Posts: 225
Joined: Jan 2015
Posted: 2017-05-23 13:48
Noble has $2bn+ in bank loans. Loan covenants almost always require being paid back at par before any bond buybacks. Otherwise it defeats the purpose of seniority in the capital structure.


Total Posts: 292
Joined: Mar 2005
Posted: 2017-05-27 14:23
If they have the cash and are not restricted by covenants or preference concerns then they can buy back their debt. Virtually all distressed banks buy back their own debt, if they survive they booked a decent gain, if they fail there may be less for remaining creditors as they paid out hard cash.

Noble has very obviously been a complete croque of sh*t for years, it has just taken a very long time to play out because over the last two years they have disposed of all material hard assets and paid off bank debt whilst also raising equity and bonds. What you have left is a company with very limited real assets to dispose of and no income/going concern value. The trading loss was a small part of the reason this thing bombed, they burnt c400mm cash and their lenders refused to roll the rcf so proforma for rcf repayment their cash was c750mm of which 300mm was with brokers. 400-500 cash is not much for a company that burns cash virtually every quarter. There are no longer a going concern, it's impossible for them to compete against other traders with large physical assets and access to cheap funding. They have so called derivative assets marked at 3.4bn which will be worth very low following default, along with small stakes and loans to mining minnows that are worth deminimus.

The banks are trying to figure if there is a way out and some will be worried about underwriting the previous deal, but I don't see a way out. You don't provide new money to a company that has no clear runway, your security may get torn up in court. They are trying to find some external investor but recent press indicates even the Chinese have turned up their noses.

Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial.
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