World Economy

European Firms Buy Back Debt Below Face Value

European Firms Buy Back Debt Below Face ValueEuropean Firms Buy Back Debt Below Face Value

For companies with enough cash on their books, there’s a silver lining to the stormy credit markets: they can buy back their bonds on the cheap.

European companies including Anglo American Plc, Deutsche Bank AG and Banco Comercial Portugues SA have agreed to buy back bonds at below their face value in recent weeks, generating instant profit and often reducing their indebtedness in the bargain. The transactions can be a way to show strength, an important statement to make in a market where investors are increasingly skeptical about the credit quality of many borrowers, Bloomberg reported.

This year, European companies bought back or announced tenders for €57 billion, ($62 billion) according to David Leeming, head of liability management for Royal Bank of Scotland Group Plc in London. That’s more than five times the amount for the same period last year, said Leeming, who monitors buybacks from companies in western Europe and Nordic nations in sterling, euros and dollars.

More of these transactions are poised to happen in the coming months and years, a development that underscores the fragile state of European economies. Many companies in the region are awash in cash, and don’t have enough confidence in their growth prospects to spend it on acquisitions, said Barnaby Martin, a European credit strategist at Bank of America Corp. Buying back debt is a way to instead reduce risk, a step that often makes sense when the profit outlook is less rosy.

“It’s a sign from companies that they feel Europe is in a deflationary situation and that it’s not a great time to take on more debt or expand,” Martin said.

There may be good reason for companies to have that fear. Consumer prices in the euro area fell 0.2% in February from the same month last year, according to a report on Monday. For three years inflation has fallen short of the European Central Bank’s goal of nearly 2%. Economic growth in the area was just 1.5% in the fourth quarter compared with the same period a year earlier.

In the case of Deutsche Bank, buybacks were partly meant to soothe investors concerned about its capital position. On February 12, the bank offered to buy back about $5.4 billion of bonds in dollars and euros in a series of transactions, after the company’s shares and debt had plunged. On Monday, the bank said that in a recent round of buybacks, investors only sought to sell $740 million of dollar bonds to the bank, of the up to $2 billion it was willing to buy.