A thought occurred to me today. Glencore's debt is trading at about 70% of face-value. If you're Glencore, what's to stop you buying that debt yourself and pocketing the difference?
In particular, are there actual rules against doing so? or is it more that companies with distressed debt tend not to be in a financial position to buy it back?
In Glencore's situation they do not have the means to purchase the debt even at the lower valuation.
As quoted in WSJ:
But investors have become concerned about the high levels of debt Glencore’s trading arm needs to quickly buy, sell and move goods around the world. Its credit rating is two notches above junk status, and a downgrade would freeze it out of crucial capital.
Once you hit junk status a lot of institutions will no longer lend and some other credit agreements might be locked out.
with nearly $30 billion in debt (Glencore), would need to dedicate excess earnings to repaying debt obligations, the analyst said.
So basically they do not have earnings to purchase the debt back if they wanted to and since they are near junk status they won't be able to refinance as the terms to refinance would be worse than keeping the current debt.
As for 'are there actual rules against doing so': There are not laws against refinancing most debt. However, I am sure a lawyer would know more about the actual legalities of the situation.
The problem lies in people don't loan money at good rates to people who need it.
Ford Motor Company did repurchase debt at a large discount during the 2008 financial crisis.
One debt-ratings agency considered Ford's actions to be a distress sale, which is a form of default. Thus, other companies that do this could harm their credit ratings.
It is also common for non-distressed corporations to buy back debt, for several reasons:
By the way, some recent accounting rule changes allow some companies to book a "profit" when the market value of their liabilities declines. Yes, this is perverse.
