Debt buy-backs
Debt buy-backs

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Debt buy-backs
  • Why might a borrower want to buy back a loan?
  • Methods of debt buy-back
  • Common issues concerning buy-backs
  • Debt buy-backs and Loan Market Association facility agreements

Why might a borrower want to buy back a loan?

The ability of borrowers, members of the borrower group and any related parties to buy back loans became a live issue when the onset of the financial crisis in 2007 led to debt from leveraged finance deals being traded at sub-par levels. Such sub-par trading was not necessarily caused by any problems with the borrower, but was a result of the fact that the lack of market liquidity was forcing many lenders to sell loans held on their books in conditions which were not ideal for trading.

There are a number of reasons why a borrower may wish to buy back its own debt, including:

  1. it is effectively a method of repaying the debt at a discount

  2. it reduces leverage and the amount of interest payable

  3. it may be beneficial to the borrower in complying with any financial covenants, as it can create substantial financial covenant headroom, and

  4. depending on the terms of the documentation, it could provide the borrower or related party with a seat at the lender's table (as they may then fall within the definition of a lender and will subsequently benefit from the rights of being a lender)

Methods of debt buy-back

Borrower purchases its own debt

This has traditionally been the most controversial