Corporate Bond - Help with Tender Offer

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CROCKD
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Corporate Bond - Help with Tender Offer

Post by CROCKD »

I have a 5 year ladder in my LIF. I have been replacing GICs with investment grade corporate bonds. I previously received some help here when I started as I had no experience with buying corporate bonds or how to evaluate. I buy online through BMOIL. One of the two bonds I have has been subject to a tender offer. It is a FF Financial Bond 6.4% returning a yield to maturity of 3.07% for the price I paid for it.
The tender offer has a lot of legalese in it that I don't understand, but it seems to me that their Option 99 Do Nothing seems to allow me to continue holding the bond and collect interest until it matures in 2021 which I am quite happy to do. Without copying all the legalese which includes the term??? Modified Dutch Auction the offers are:-

Terms:

*All tender of Notes shall be made in minimum denominations of CAD $1,000 or integral multiples thereof**

Option 1: Base Spread (Maximum) At 185 BPS

Option 2: Competitive Spread At 180 BPS

Option 3: Competitive Spread At 175 BPS

Option 99: Do Nothing
Holder to Retain Security


Is my interpretation of Option 99 correct?
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Re: Corporate Bond - Help with Tender Offer

Post by Peculiar_Investor »

I'm holding a couple of Fairfax Financial Holdings bonds, including the 25-May-21 6.4%. Is that the bond you are talking about? I haven't received any notification from TDDI that action is required. Do you have a link to the tender offer?

Added: Found it, Fairfax - Fairfax Announces Cash Tender Offer for Senior Notes by Way of Modified Dutch Auction. And yes one of my Fairfax Financial Holdings is part of the auction.
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Re: Corporate Bond - Help with Tender Offer

Post by Peculiar_Investor »

Finally received the Corporate Action Notice via snail mail from TDDI this week. Now the hard part, reading it over and understanding my options.
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Re: Corporate Bond - Help with Tender Offer

Post by scomac »

Here is a page explaining the intricacies of the Dutch auction.

http://www.investopedia.com/terms/d/dutchauction.asp

Based on the information in the press release details the tender offer is being priced off of the Jun 01, 2021 CAN 3.25% with a choice of premiums. That bond is currently priced at $108.98.

There are two questions to be answered. Firstly, do you want to keep the security or tender it? You've indicated that you would rather keep it, so the second question, which option, becomes moot.

Opportunity cost: If we assume we want to tender and accept the least favourable terms what do the numbers look like?

The reference security above with a 175 bps spread attached is now worth ~$117. How does that compare to the actual price of the bond being tendered? The May 25, 2021 Fairfax 6.4% is currently priced at $114.41 so you are getting a bit of a premium over market to tender to this offer. The problem then becomes what do you replace it with? You could make a bit of arbitrage money by tendering and then buying back the new issue at $104.70, but you are extending your term out another five years.

Another thing to consider is that if your holding is in any amount other than round tranches of $1000 you will be left with some residual amount which is far from ideal.

These deals are set up to favour the issuer. If you're happy with the security then you are usually just as far ahead to keep it to maturity rather than jump through a bunch of hoops in order to realize a small profit. YMMV
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Re: Corporate Bond - Help with Tender Offer

Post by kcowan »

That has always been my strategy. Why would the issuer go through such hoops to get a less attractive offering for them. Sure maybe they made some wrong assumptions or maybe the bank convinced them to do it.
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Re: Corporate Bond - Help with Tender Offer

Post by CROCKD »

Thanks scomac for your detailed reply.
I will obviously keep the bond to maturity which I bought in lieu of a 5 year GIC on a ladder. Not willing to accept 5 year GIC rates I bought it to obtain a better yield realizing it is not CDIC insured like a GIC, but as an investment grade bond willing to take the risk for the amount of money involved.
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Re: Corporate Bond - Help with Tender Offer

Post by Peculiar_Investor »

Me too in thanking scomac for the detailed reply. Very helpful in sorting out the legalese into something actually useful and understandable. :thumbsup: :thumbsup:
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