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Dutch telecoms group KPN has combined bond buybacks with sales of new bonds

Klépierre, a French commercial real estate company on Monday joined a growing list of entities taking advantage of low borrowing costs and buying back their existing debt.

Companies are replacing existing bonds with new debt, offering investors less interest despite holding on to their money for longer.

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The practice reflects central bank policies that have pushed down the cost of long-term borrowing, giving companies the chance to refinance at some of the lowest rates on offer ever, and the limits of a policy when many businesses do not need fresh capital.

“Companies are taking the view that new issue market conditions are extremely good and not to be missed,” said Vijay Raman, head of liability management at Société Générale.

“There is often very little scope to put the cash to work for traditional capital expenditures or mergers and acquisitions; hence the best use of cash raised is buying back your own debt,” he said.

Klépierre launched a buyback of debt that matures in 2019 and 2021 after it sold a new bond which it will not have to pay back for 15 years.

The new bond carries a coupon of 1.25 per cent, while the existing 2019 bond pays investors 2.75 per cent and the 2021 bond pays 3.25 per cent.

Others combining bond buybacks with sales of new bonds include Brazil’s biggest cement company Votorantim Cimentos and Dutch telecoms business KPN.

Companies are taking the view that new issue market conditions are extremely good and not to be missed

– Vijay Raman, Société Générale.

In Europe, negative interest rates mean depositors are charged for leaving money at the bank, which gives companies little incentive to borrow unless they have a use or need for the cash, said Marc Baigneres, head of debt capital markets for Europe and the Middle East at JPMorgan.

The reward for investors was getting paid back more than the face value of the debt — as the price of outstanding bonds increases as interest rates fall — despite losing the chance to collect the rest of the interest rate payments, said Suki Mann, an independent credit analyst with Credit Market Daily. “If you’re clipping coupons you’re going to be a bit reluctant to sell,” he said.

However the danger for investors is that longer-dated debt gives a company more time to get into trouble, so it tends to have a greater risk of default. Such bonds are also more sensitive to the rate of inflation, which erodes the value of debt over time.

At a broader level, the practice can move the overall composition of the bond universe, even if the size of the market remains the same. One senior banker said, “the market is not absorbing more volume but is absorbing more risk”.

The average yield on European investment grade bonds is 0.68 per cent, according to the Bank of America Merrill Lynch index, leaving investors who want higher interest rate payments with the choice of taking on the risks that come with buying longer-dated debt or lending to less reliable borrowers.

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