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Debt capital markets: Corporates buy back debt

While corporate bond issuance in Europe has got off to a record start for the year, in Asia another trend is dominant: debt buybacks.

More than 20 corporates have acted like fixed-income portfolio managers over the past 12 months, buying back their debt at bargain prices. These include Hutchison Whampoa, Mahindra & Mahindra and Galaxy Entertainment. With corporate bond prices likely to remain low, especially as Asian governments pile on debt to help fund their economic stimulus packages, the buyback trend looks set to accelerate.

"Since the end of last year a lot of borrowers have been considering buying back their debt given how depressed their straight bond and convertible bond prices are," says Terence Chia, a debt syndicate official at Citi in Hong Kong. Bond prices on average were down nine points on Asian high-grade debt over the past year and 18 points on high yield, according to Morgan Stanley.

In a research report published at the beginning of February, the US bank says: "There are interesting variations to the buyback pattern: some issuers have bought through public tender, for example Galent, while others have stuck to a strategy of almost actively supporting their debt in the secondary market through opportunistic piece-by-piece buying."

Debt buybacks make most sense when the savings from the buyback outweigh the opportunity cost of using the capital elsewhere and when corporates have spare cash, the bank adds.

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