June 29, 2005
Coerced Tenders
Posted by Caroline Bradley

The National Federation of Municipal Analysts is concerned about what it perceives to be an increasingly frequent occurrence of bond issuers, bond trustees and investment bankers getting together and coercing bondholders to sell their bonds under the threat that if they refuse the bonds will be redeemed at par.

In a Position Paper on Coerced Tenders the NFMA says that a common technique involves simultaneous issuance to bondholders by the bond trustee of an optional tender offer and an irrevocable redemption notice for any untendered bonds (the paper points out that the redemption notice is only "irrevocable" in a rather strange way because it does not operate where the bondholder decides to accept the tender offer - instead it is "an impermissible contingent notice of redemption"). So the bondholders are coerced into accepting a little more than par for tendering bonds under the threat of redemption, although the bond issuer arguably has no interest in in fact redeeming all of the bonds for a number of different possible reasons, including its desire to use the bonds in derivative transactions.

Looks like a classic collective action problem - all of the bondholders should refuse to accept the tender offer? Well, as the NFMA points out, this may not be possible if the bondholders are subject to fiduciary duties to their shareholders. The NFMA is concerned that the bond trustees who go along with this sort of thing aren't nearly conscious enough of their own fiduciary duties to the bondholders.

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