Macquarie Group and Insurance Australia Group are running a nice little lurk at the moment. They are taking advantage of the global financial crisis which has seen the prices of some debt fall because of fears those companies are in trouble and might default.
The prices of their debt has plunged to less than 50 cents in the dollar in some cases, or less.
That has encouraged the two companies to buy back previously issued debt at a discount, thereby booking profits on the way through. It’s part of a wider trend in Europe for banks to buy back discounted low ranking debt, although this is being done at the suggestion of bank regulators who want banks to improve the quality of their capital.
For example, IAG revealed yesterday that it had repurchased a further 36 million pounds of its sterling denominated subordinated debt at a 30% discount to face value. This follows the repurchase of 108 million pounds of subordinated debt at the same discount, announced in late February.
IAG said that as a result, it will recognise an additional pre-tax profit of approximately $23 million in 2H09, bringing the total pre-tax profit from these transactions to approximately $93 million.
In total, the Group’s cash consideration to repurchase its subordinated debt, when applying the 30% discount to face value, was 101 million pounds or about $224 million.
And last week it was reported on Bloomberg and Reuters that Macquarie Bank is seeking to buy back $340.1 million of its subordinated dollar bonds maturing September 2015 for as little as half their face value. That will also produce a very handy pre-tax profit this half.
Bloomberg said Macquarie was offering investors at least 50 cents on the dollar and no more than 60 cents plus accrued interest through a version of a so-called “Dutch auction.” The securities are listed in Luxembourg.
The Financial Times reported last month that this is now a trend in Europe.
“European banks are boosting their capital bases by repaying billions of euros worth of junior bonds at hefty discounts to face value and booking the difference as profits that can be added directly to core equity,” the paper said.
It said that French bank, Credit Agricole had offered to buy back 750 million pounds worth of junior debt at a 28% discount to face value.
The paper said that Swiss Bank UBS had completed a similar deal, while Lloyds of the UK and Royal bank Of Scotland had offered to exchange or buy back junior debt with a value of up to 7.5 billion pounds and 15 billion pounds respectively.
Macquarie’s offer closes Wednesday night, our time.
Bloomberg said Macquarie sold $US350 million of senior subordinated floating-rate notes in 2005 to boost its Tier 2 capital. The notes pay 0.25 percentage point over the London interbank offered rate, rising to 0.75 percentage point from September 2010. The securities were quoted at 35 US cents on the dollar last week, down from 45 cents at the end of 2008.
That’s a discount of 65%. No wonder Macquarie is buying them back, it’s a steal.