What Does it Mean When a Company Buys Back Debt?

Sometimes a company will choose to issue debt as a means of raising capital. Generally, this debt will take the form of an issue of bonds. These bonds will be sold to investors, who will be compensated for their investment by being paid interest on their purchase. Occasionally, instead of repaying this debt according to the original terms, a company will choose to buy the debt back, thereby lessening its total debt load.

Issuing Debt

Companies may choose to issue debt for a number of reasons. However, in most cases, the companies will want to raise money for expansion or, in some cases, to pay back older debts. Often, companies will issue new debt as a means of effectively refinancing their old debt. The rate of interest the company will have to pay will generally depend on the company's perceived creditworthiness, with less creditworthy companies required to pay higher rates.

Buying Back Debt

Normally, companies will pay off this debt a little at a time by making payment on the bonds. However, sometimes companies will not want to wait to pay off this debt according to the original timeline. In such a case, the company will go ahead and purchase the debt on the open market, just like any other investor. Any debt that it purchases, it no longer has to pay interest on, as it would be paying interest to itself.

Advantages

There are several advantages to a company buying back debt. First, the company will have less outstanding debt on its books. A company with less debt is generally considered more valuable than a company with more, as the company with less debt has fewer liabilities. In addition, if a company buys back its debt, it will no longer have to pay interest on the bonds, meaning that it can save money on interest payments.

Considerations

A company takes some risks in buying up debt early. For example, if the company buys up too much debt, it may not have enough cash on hand to finance operations necessary to keep the business in good health. Many companies continuously keep a small amount of debt on their books, which they regularly make payments to. A healthy company will not allow this debt to go delinquent and cause its credit rating to fall.

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