Repurchases of Bonds through Tender Offers: Implications for Shareholder Wealth

The Agency Cost Rationale for Refunding Discounted Bonds

“…Mayor and McCoin conclude that refunding when the market rate exceeds the coupon rate cannot be advantageous to the firm in the single period case and that Ang's conclusion is of dubious importance for the multiperiod model. The essence of this view is shared by Johnson and Klein (1974) and Laber (1978).…”

Refunding Noncallable Debt

“…In our illustration, such a tender premium could be as high as $2.85 million above the prevailing price of the old bonds ($1.57 million divided by one minus the applicable 45 percent corporate tax rate) before the incremental after-tax cost thereof at t = 0 would eliminate the identified refunding gain. Laber [20] cites an event of this sort that occurred several years ago, when the Bell System retired some of its operating-subsidiary debt that at the time was not contractually callable. The case of New York State Electric and Gas [25] provides a more recent tender-offer example.…”

Refunding Discounted Debt: A Clarifying Analysis

“…The issue of whether discounted debt can be refunded profitably remains unresolved despite the extensive literature that has accumulated on the subject. Previous studies concerning the economics of refunding discounted debt, most notably Ang [1] and [2], Caks [6], Harris [9], Johnson and Klein [12], Kalotay [13], Laber [15], and Mayor and McCoin [19], have reached conflicting conclusions principally because the authors made differing tax assumptions (or ignored taxes altogether). Each of these studies also ignored the impact of the refunding on the firm's debt capacity.…”

“… Ang ([1] and[2]) andMayor and McCoin [19] instead discount the change in pre-tax debt service at the pre-tax cost of a new issue, and Harris(9] and Laber[15] discount the change in aftertax debt service at the pre-tax cost of a new issue.…”