How to Retire Debt Through a Tender Offer

by Wilhelm Schnotz

Issuing bonds can be an easy way for companies to generate revenue to fuel growth and develop a repayment plan that suits the financial needs of both the company and investors. When a company's cash flows increase, however, it's natural to want to erase that debt -- and the interest charges that come with it -- and relieve the company of outstanding debts. While companies can't cancel bond agreements with investors unilaterally, they can issue a tender offer and potentially purchase bonds back and retire the bond debt from the company's ledger by paying investors premium rates above the bond's value.

1. Evaluate the amount of debt you wish to retire through the tender offer. Start by determining the amount of liquid assets you can devote to repurchasing bonds. Your tender offer won't retire that amount of debt from the books, as offers provide an incentive to bond holders to sell by paying a premium above the bond's value. Divide the amount of money you can devote to the offer by the premium amount, represented as a percentage, above the bond's overall value to determine the amount of bond debt you can retire. For example, if you plan to pay a 15 percent premium, and can devote $10,000 to the offer, you may repurchase up to $8,695 in face-value amounts at the premium rate, or $10,000 divided by 1.15.

2. Determine the minimum and maximum amounts of debt you will repurchase in the tender offer. Minimum levels should be set high enough to make the effort worth administrative costs and set maximum purchase levels using the figure calculated in Step 1. If investors don't agree to tender enough bonds as the minimum level, the offer will be void.

3. Submit Schedule TO to the Securities and Exchange Commission (SEC) to outline the tender offer. Tender offers must meet legal requirements about disclosure of ownership and new debt balances.

4. Notify bond holders of the tender offer, providing them with information on the debt restructuring as well as providing them with a published and formal tender offer. Information about the tender offer should include the information submitted to the SEC on Schedule TO.

5. Notify bond holders of the start and end date of the offer. You must provide at least 20 days to respond to a tender offer.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.