Buying Back Bonds 
Tuesday, April 7, 2009, 02:52 PM
Posted by Richard Senior
These is an increasing trend for issuers to buy back bonds at a discount. In the banking world, Macquarie Bank is offering between 50 and 60 cents on the dollar for $340m of its own subordinated bonds.

This is a good deal for the bank-if I borrow $10 from you, and you agree to extinguish the debt if I pay you $5, I have a $5 profit/increase in capital.

In the structured world, we have recently seen Terra Firma's GRAND (another contrived acronym, don't ask) buying up its own sub notes at 30-50% of par; and Canary Wharf Finance II offering to buy various notes at between 15 and 50% of par. Some of these notes were issued only 2 years ago, in April 2007!

This is just one more sign of markets being artificially depressed by technical factors, or irrational behaviour if you prefer, and the tremendous value to be had in some (not all!) structured bonds. According to Fitch's analysis, typical UK AAA prime RMBS starts to incur losses when peak-to-trough house price declines are 60%, and defaults are 30%. And that will be on par, not the currently extremely low market prices.

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