Open Market Purchase
An Open Market Purchase in a leveraged-loan agreement is a negotiated purchase of outstanding term loans by the borrower, a permitted subsidiary or another eligible affiliate from individual lenders, often on a non-pro-rata basis.
Discounted repurchases can reduce debt efficiently
When a borrower's term loans trade below par, buying debt back at the market price can retire more face principal than the cash spent.
That can improve leverage if the borrower has sufficient liquidity and the transaction is permitted.
The purchase is not necessarily pro rata
Current agreements expressly allow selected open-market purchases on a non-pro-rata basis.
The borrower can negotiate with particular selling lenders rather than offering identical terms to the entire class.
Purchased loans are commonly cancelled
Modern agreements often require borrower-purchased term loans to be automatically cancelled and retired.
That prevents the borrower from holding its own debt as a voting instrument or later reselling it unless the document expressly permits a different treatment.
Conditions protect the capital structure
Credit agreements can prohibit use of revolving borrowings to fund repurchases, require no continuing Event of Default and impose affiliate-lender restrictions.
Those conditions prevent unrestricted use of liquidity to manipulate the lender group during stress.
Buying debt below par can create immediate face-value deleveraging
Assume a borrower has $150 million of excess cash and its term loan trades at 85.
If the agreement permits an Open Market Purchase, $85 million of cash can retire $100 million of face principal before transaction costs. The borrower effectively reduces debt by $15 million more than the cash paid.
The trade-off is liquidity. That $85 million is no longer available for operations, acquisitions or other uses.
A discounted repurchase therefore makes the most sense when the borrower has sufficient liquidity, the debt discount is meaningful and the expected benefit of lower leverage exceeds the value of retaining the cash.
Common mistakes
Treating every secondary-market trade as a borrower Open Market Purchase The term here refers to purchases by permitted borrower-side parties.
Assuming purchases must be offered to all lenders Open-market transactions can be selective.
Ignoring cancellation rules The acquired principal is commonly retired.
Example
A borrower has $1 billion of term loans trading around 92 cents on the dollar. It negotiates with several lenders to buy $100 million face amount for $92 million. If the credit agreement permits the transaction and requires cancellation, gross debt falls by $100 million while the borrower spends $92 million plus transaction costs.
Example
A borrower has $1 billion of term loans trading around 92 cents on the dollar. It negotiates with several lenders to buy $100 million face amount for $92 million. If the credit agreement permits the transaction and requires cancellation, gross debt falls by $100 million while the borrower spends $92 million plus transaction costs.
Professional note
Open-market repurchases can create meaningful deleveraging when debt trades below par, but they consume cash and can affect lender voting, liquidity and tax or accounting outcomes. The credit agreement determines who may buy and what happens to the acquired loans.
Related terms
- Debt Paydown
Debt paydown is the reduction of a portfolio company’s outstanding borrowings after an acquisition, often through scheduled amortization, optional prepayments or required repayments funded by excess cash flow or asset-sale proceeds.
- Term Loan
A term loan is debt advanced for a specified term and repaid according to the loan agreement through scheduled amortization, mandatory prepayments, a maturity payment or some combination of those mechanisms.
- Mandatory Prepayment
A mandatory prepayment is a repayment of loan principal that a borrower is contractually required to make when specified events occur, such as generating excess cash flow, receiving asset-sale proceeds, issuing certain debt or receiving casualty proceeds.
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