Fitch Rating notes that APAC corporates’ notable rise in bond buybacks since 2H22 highlights the trend of embarking increasingly on opportunistic tender offers to reduce interest expenses and improve balance sheets as rates rise.
According to the rating agency, eighteen APAC corporates have announced tender offers to partially repurchase their combined 46 outstanding bonds so far. This compares with 17 completing such tender offers on their combined 20 outstanding bonds during 1H22. Notably, the 31 bonds tendered so far during 4Q22 is already a quarterly record. Fitch also believes that a wider group of APAC corporates is quietly repurchasing minor portions of their bonds without making official tender offers.
Corporates are taking advantage of the 5%-25% price discount on their bonds to reduce expenses. Moreover, companies with robust cash flow are using the opportunity to proactively minimise balance-sheet risk by reducing outstanding bonds maturing over the next two to three years.
By size, Softbank Group Corp. dominates the tender offers during 2H22 after repurchasing USD2.3 billion worth of its outstanding bonds in October 2022, equivalent to nearly 15% of its outstanding US dollar- and euro-denominated bonds and subordinated bonds. This was made possible by a combination of internal resources and ongoing asset-monetisation programmes after consecutive record losses during the last two quarters.
By sector, the energy and utilities (E&U) issuers accounted for five of the 18 making tender offers, followed by the metals & mining and the telecom sectors, each with three corporates. Higher commodity prices over the past year have boosted cash flow generation in the E&U and metals & mining sectors.
Another example in E&U is the Indonesian upstream oil and gas producer PT Medco Energi Internasional Tbk (B+/Positive), which has been generating solid operational cash flow thanks to high oil and gas prices. Its tender offer on three of its dollar bonds (2025, 2026 and 2027) announced in October was oversubscribed to the extent that it decided to dedicate the entire USD250 million to repurchasing 50% of the earlier maturing 2025 bond. Strong ongoing cash flow is likely to more than offset the USD150 million credit facility that Medco may have drawn down on to help fund this buyback.
In the Indonesian coal mining sector, both PT Indika Energy Tbk (BB-/Stable) and PT ABM Investama (B+/Stable) have used their higher cash flows to engage in early liability management and repurchase their bonds. PT ABM Investama’s offer price of USD100 is significantly higher than the current market price of USD87, underlining the focus on using high coal prices to reduce debt. The offer is scheduled to close on 2 November 2022.
Rising concerns over ESG considerations with the potential to restrict funding access over the medium term is another factor driving some coal miners’ decisions to reduce borrowings, especially after they have accumulated significant cash positions from high coal prices.
Currency risk is likely to be another concern for some. Chinese hotpot restaurant chain Haidilao International Holding Ltd. (BBB-/Negative) repurchased 45% of its dollar bonds due 2026 in October at a purchase price of USD84. The company capitalised on its discounted bond price and financed the buyback with internal surplus liquidity saved from a recent scale-back of expansion. Its mainly China-focused operations make taking on currency risk longer term less optimal, especially against a strong dollar.
Similarly, Indonesian property developer PT Alam Sutera Realty Tbk (ASRI, B-/Stable) repurchased 81% of its secured dollar notes due 2024 to reduce its foreign-currency exposure and balance-sheet risk by cancelling debt maturing over the next two years. ASRI funded the acquisition with an undisclosed mixture of cash on hand and a local-currency eight-year syndicated loan.
