Published April 4, 2009

Asian companies buying back bonds

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(Hong Kong)

ASIAN companies are slowly starting to buy back bonds to strengthen their balance sheets, focusing on cheap convertible issues before committing precious cash to purchases of regular debt.

While many firms are playing it safe in a world where credit is hard to come by and sales are suffering, companies such as Nine Dragons Paper have made eye-popping returns by repurchasing their bonds, many of which are at deep discounts due to forced selling by hedge funds last year.

'Return on cash is so low in the current environment and the return on corporate debt is so high, it makes sense from a return on capital point of view to buy back debt,' said Morgan Stanley credit analyst Viktor Hjort.

Buying back bonds can offer companies better returns than their core businesses under current economic conditions, while buying back convertibles would also ease investor concerns about some companies' near-term refinancing needs. But such strategies are not without risk.

Companies need to weigh whether to commit their precious cash even as sales are worsening, and depleting cash reserves now could deprive firms of business opportunities when economies begin to recover.

In February, top Chinese paper board producer Nine Dragons repurchased US$165 million worth of straight bonds at 53 US cents on the dollar, aiming to cut its gearing level, or debt-to-equity, to 60 per cent in 2010/2011 from 102 per cent at end-2008.

The company, whose net profit dived nearly 70 per cent for the six months ending December, aims to repay debt early, cut capital spending and delay expansion plans to weather the global financial crisis and rapid industry integration. -- Reuters