Fitch Ratings – The notable uptick in APAC corporate bond buybacks since 2H22 highlights the trend to increasingly engage in opportunistic takeover bids to reduce interest charges and improve balance sheets as as rates rise, according to Fitch Ratings.
Eighteen APAC companies announced takeover bids to partially repurchase their combined 46 bonds outstanding so far in 2H22. By comparison, 17 made such tender offers on their combined 20 outstanding bonds during 1H22. Notably, the 31 bonds offered so far in 4Q22 is already a quarterly record. Fitch also believes a broader group of APAC companies are quietly buying up small portions of their bonds without making formal takeover bids.
Companies are taking advantage of the 5 to 25% discount on their bonds to reduce their expenses. Additionally, companies with strong cash flows are taking the opportunity to proactively minimize balance sheet risk by reducing outstanding bonds maturing over the next two to three years.
By size, Softbank Group Corp. dominates takeover bids in 2H22 after repurchasing $2.3 billion of its outstanding bonds in October 2022, or nearly 15% of its outstanding US dollar-denominated bonds and subordinated bonds and in euros. This was made possible by a combination of internal resources and ongoing asset monetization programs after consecutive record losses over the past two quarters.
By sector, energy and utilities (E&U) issuers accounted for five of the 18 takeover bids, followed by the metals and mining and telecommunications sectors, each with three companies. Rising 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 Indonesian upstream oil and gas producer PT Medco Energi Internasional Tbk (B+/Positive), which generated strong operating cash flow on the back of high oil and gas prices. Its takeover bid on three of its dollar bonds (2025, 2026 and 2027) announced in October was so oversubscribed that it decided to spend the entire $250 million to buy back 50% of the 2025 bond with an earlier maturity. Continued strong cash flow should more than offset the $150 million credit facility that Medco was able to draw on to help fund this buyout.
In Indonesia’s coal mining sector, PT Indika Energy Tbk (BB-/Stable) and PT ABM Investama (B+/Stable) used their higher cash flows to engage in early liability management and buy their obligations. PT ABM Investama’s offer price of $100 is significantly above the current market price of $87, underscoring the focus on using high coal prices to reduce debt. The closing of the offer is scheduled for November 2, 2022.
Growing concerns over ESG considerations with the potential to restrict access to medium-term finance is another factor driving some coal miners’ decisions to reduce borrowing, particularly after building up large cash positions through to high coal prices.
Currency risk is likely to be another concern for some. Chinese hotpot restaurant chain Haidilao International Holding Ltd. (BBB-/Negative) bought back 45% of its dollar bonds due 2026 in October at a purchase price of 84 USD. The company capitalized on the discounted price of its bonds and funded the buyout with internal excess cash saved from a recent reduction in expansion. Its primarily China-focused operations make taking long-term currency risk less optimal, especially against a strong dollar.
Similarly, Indonesian property developer PT Alam Sutera Realty Tbk (ASRI, B-/Stable) redeemed 81% of its US dollar secured notes due 2024 to reduce its currency exposure and balance sheet risk by canceling debt coming due within the next two years. ASRI funded the acquisition with an undisclosed mix of cash and an eight-year local currency syndicated loan.