Introduction to Liability Management

What is liability management and why is it used?

Liability Management (LM) is a set of techniques used by debt issuers in the capital markets to manage, modify, or retire their debt prior to maturity. The most common forms of LM are debt buybacks, debt exchanges, and debt modifications. 

LM is used to reduce the pressure on a company's funding desk by taking action on bonds that are nearing maturity. Companies use LM for various reasons such as improving credit metrics, increasing financial flexibility, or accounting considerations. Understanding LM is crucial to executing a successful LM transaction.

What techniques are involved in liability management?

Liability Management (LM) involves three main techniques: consent solicitations, tender offers, and exchange offers. 

Consent solicitations involve seeking the consent of bondholders to make amendments to the terms and conditions of the bonds, which become binding on remaining bondholders whether or not they approved the proposed amendments. 

Tender offers allow issuers to buy back their bonds before maturity using cash on the balance sheet or via new bond issuance. 

Exchange offers allow bondholders to exchange their existing bonds for new ones. These techniques can be combined to achieve a company's objectives or increase take-up, creating incentives for bondholders to participate in the exercise.

Why do companies use liability management?

Companies use liability management techniques for various reasons depending on the specific technique used. 

Consent solicitations are used to amend the terms of existing bonds, such as relaxing certain covenants to increase financial flexibility or changing references to LIBOR. 

Tender offers funded by cash help deleverage and improve credit metrics, while buying back bonds with near-term maturities and financing new longer-dated bonds can extend debt maturity profiles. 

Exchange offers are used when demand for new bonds is relatively limited, to achieve favorable P&L outcomes, or when technical amendments are required, such as a change of issuer. Understanding the motivations behind each technique is essential for successful LM transactions.