Liability Management in Practice

What are the mechanics involved in the different types of LM transactions?

The mechanics of different types of LM transactions involve various procedures and protocols. In consent solicitations, the terms of the bonds and agreements dictate the process for seeking noteholder consent. Bondholders are incentivised to vote in favor through the payment of fees. 

Tender offers involve a public announcement by the company regarding its intention to buy back certain bonds, with buyback levels set at a premium to market levels prior to the LM announcement. The company can set a priority order for acceptance, and legal counsel and a tender agent must be engaged to produce the documentation and facilitate settlement. 

Exchange offers are similar to tender offers, but instead of cash, bondholders receive new bonds with different pricing terms and specifications.

What drives bondholder participation in an LM exercise?

Bondholder participation in liability management (LM) exercises is primarily driven by economic incentives and risks associated with non-participation. 

Consent fees and premiums offered in tender offers are common incentives, while the potential loss of consent fees or reduced liquidity can act as disincentives for non-participation. 

Bondholder composition also influences take-up, with investors who prefer to hold bonds to maturity being less likely to participate in tender offers. 

Careful consideration of incentives and disincentives is essential, as overly coercive structures can lead to investor pushback and reputational risk for the company. Precedent transactions can provide guidance on market conventions and outcomes of LM exercises.