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Buy back debt at a discount
The discount idea
Picture a company with $500 million of bonds outstanding that trade at $250 million, a 50% discount to par. If it does nothing and waits for maturity, it owes the full $500 million. If it raises cash and buys the bonds back at their trading value, it captures $250 million of discount, assuming prices hold while it buys.
Loans and Serta
Bonds make this easy because they trade openly. Term loans have no active, traceable trading market, but the idea carries over. Companies that cannot get money from the regular debt markets try to do both at once: borrow in a non-traditional way and capture the discount. Serta did this in June 2020, after March through May of the pandemic had been brutal for retail.
Outside bankruptcy
Many of these deals aim to avoid a crash landing in bankruptcy by raising capital outside it. Inside bankruptcy, every creditor has to be treated the same. Outside it, the contract is the only rule, so finance lawyers and investment bankers look for ways to reward the creditors who put in new money, even at the expense of those who do not, and the fight is over whether the contract allowed it.
Why do distressed bonds trade below face value?
A bond's market price reflects what investors expect to collect, not what the issuer promised to pay. When the chance of default rises, buyers will pay only the amount they expect to recover. A bond that trades at half of its face value is pricing in a substantial risk that holders will not be repaid in full. The face amount, called par, stays printed on the bond regardless of what the market thinks it is worth.
Why can't term loans be traced like bonds?
Corporate bond trades are reported to FINRA's TRACE system, which publishes prices to the public shortly after each trade. Loans are privately negotiated contracts, and they change hands through dealer desks and assignment agreements that carry no public reporting requirement. That leaves buyers and sellers relying on dealer quotes and conversations to gauge a price. The structure is a major reason loan pricing is less visible than bond pricing.
Why do companies try to raise money outside bankruptcy?
Chapter 11 brings court supervision, large professional fees, public disclosure, and disruption to customers and suppliers. A deal done outside it can be negotiated privately and closes without a judge approving each step. The Bankruptcy Code's rule that creditors in the same class receive the same treatment does not apply to a private deal. Outside bankruptcy, the loan or bond contract is the main rule that limits what a company can do.
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