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A thought occurred to me today. Glencore's debt is trading at about 70% of face-value. If you're Glencore, what's to stop you buying that debt yourself and pocketing the difference?

In particular, are there actual rules against doing so? or is it more that companies with distressed debt tend not to be in a financial position to buy it back?

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    It's trading at 70% of face value because that's the perceived value of it - i.e., the likelihood of being paid back is 70%. If the company started buying debt back, the price would hop back up to 1 right away, wouldn't it? And would a company who had any available cash have debt fall to 70% realistically? – Joe Sep 28 '15 at 18:19
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    Why would anyone sell back the debt to the originator at a cut price? – Lightness Races in Orbit Sep 29 '15 at 0:01
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    Isn't this basically the same as settling the debt? They could go directly to a creditor and offer to settle for 70 cents on the dollar. To the creditor, this is the same as selling on the open market for 70 percent of face value. But of course the debtor would have to have cash for that - and usually when you borrow, it's because you want to spend the money, so you usually don't sit on cash. – Nate Eldredge Sep 29 '15 at 0:13
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    As a side note, if we were to assume that Glencore has enough cash on hand to buy all their debt back, they still couldnt do it because as they started buying up the debt the price would go up (quickly). – David says Reinstate Monica Sep 29 '15 at 1:35
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    @LightnessRacesinOrbit: if the bonds trade publicly on an exchange then you don't really have a means to restrict who you sell them to. So they'd sell them to the originator for the same reason they'd sell to anyone else: because somebody offered their asking price. – Steve Jessop Sep 29 '15 at 12:57
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In Glencore's situation they do not have the means to purchase the debt even at the lower valuation.

As quoted in WSJ:

But investors have become concerned about the high levels of debt Glencore’s trading arm needs to quickly buy, sell and move goods around the world. Its credit rating is two notches above junk status, and a downgrade would freeze it out of crucial capital.

Once you hit junk status a lot of institutions will no longer lend and some other credit agreements might be locked out.

with nearly $30 billion in debt (Glencore), would need to dedicate excess earnings to repaying debt obligations, the analyst said.

So basically they do not have earnings to purchase the debt back if they wanted to and since they are near junk status they won't be able to refinance as the terms to refinance would be worse than keeping the current debt.

Source

As for 'are there actual rules against doing so': There are not laws against refinancing most debt. However, I am sure a lawyer would know more about the actual legalities of the situation.

The problem lies in people don't loan money at good rates to people who need it.

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Ford Motor Company did repurchase debt at a large discount during the 2008 financial crisis.

One debt-ratings agency considered Ford's actions to be a distress sale, which is a form of default. Thus, other companies that do this could harm their credit ratings.

It is also common for non-distressed corporations to buy back debt, for several reasons:

  • To reduce their interest rate. (Usually such debt is not trading at a discount, though.)
  • To improve their credit rating, by improving their debt-to-asset ratio or coverage ratio.
  • As part of a corporate takeover.
  • To smooth out their cash flow. For example, they might have "too much" debt maturing at one time, and pre-emptively roll some of it over to a later maturity date.

By the way, some recent accounting rule changes allow some companies to book a "profit" when the market value of their liabilities declines. Yes, this is perverse.

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  • How much stuff is a pointless artefact of yearly budgeting/reporting? It's time accounting went from batch to continuous processing :) – Rob Grant Sep 29 '15 at 9:00

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