Refunding Noncallable Debt

Determinants of bond tender premiums and the percentage tendered

“…Hypothesis 1c: Tender premiums will increase with time to maturity. Emery and Lewellen (1984) show that a profitable tax arbitrage exists when firms refund premium debt (generating a taxable loss) with lower coupon new debt. The present value of this exchange is increasing in the difference between the at-issue yield of the original debt and current yields as well as the marginal tax rate of the firm.…”

“…24 The insignificance of marginal tax rate could be attributable to noisy and incomplete tax data. Alternatively, the insignificance of marginal tax rate coupled with the significant negative relationships between tender premium and the yield curve variables suggests that many tendering firms are simply refunding during favorable market conditions rather than trying to capitalize on the tax arbitrage described by Emery and Lewellen (1984).…”

Tax‐timing Options, Leverage, and the Choice of Corporate Form

“…To assess the likelihood of this occurring, consider the time t + 1 payoff on the tax option of the equityholders in the merged firm. Since the max ( " -) function is convex, for any state s at time t + 1 the payoff is (5) with the strict inequality holding unless…”

“…To see the opportunity, take a situation in which a firm's bonds have risen in price to above par, after issuance. The attendant valuation loss for shareholders can be translated into an immediate cash tax saving that can be distributed as a dividend without affecting either the investment plan of the firm or any future cash flows to equity [5]. The firm simply can issue new debt that duplicates all the (remaining) debt service features of the old, and buy up the old debt in the marketplace."…”

Shareholder gains from callable‐bond refundings

“…Frequent attention has been paid in the finance literature to the valuation gain that can be realized for shareholders when a firm calls, for retirement and refunding, an existing nonconvertible debt issue (Bowlin, 1966;Boyce and Kalotay, 1979a;Brick and Wallingford, 1985;Emery and Lewellen, 1984;Finnerty, 1986;Lewellen and Emery, 1981;Livingston, 1980;Ofer and Taggart, 1977;Pye, 1966;Yawitz and Anderson, 1977). The central principle that has emerged from these analyses is the concept of 'parity' in the firm's future financial obligations as the key to a proper assessment of the refunding gain (Franks and Hodges, 1978;Lewellen and Emery, 1981;Ofer and Taggart, 1977;Yawitz and Anderson, 1977).…”