A loophole in Securities & Exchange Commission tender rules has opened the door to a breed of bond tender offers that various bond market buy-siders are calling "predatory" and "exploitative." The practice, alternately called "mini-" or "trashy-" tenders, takes advantage of an SEC rule enabling any firm to tender for up to 5% of a company's bonds (or stock) without registering their activity. With increasing frequency, this has given rise to firms which send banks, money managers and mutual funds--both large and small--official looking tender offers for a company's bonds at up to 15 points below market price. One veteran buy-side trader, Jim Claire of Evergreen Investment Management, calls these companies "shady operators," arguing that they try to exploit bond managers' fiduciary obligation to pass on tenders to clients. Claire continues, "I hope someone gets around to shutting these [crooks] down."
Another bond manager, J.P. Weaver of McGlinn Capital Management in Philadelphia, who has experience in dealing with these companies, argues that their goals are fairly straightforward. "They know they won't pick us off because we'll argue with large dealers over a basis point or two," continuing that "they want us to pass on the tender offer, which looks legal and official, to some of our individual investors, who won't know how they are being exploited." He says that the "legal jargon" and par value amount (i.e. $800-900 per bond) "might confuse people" who don't frequently handle fixed-income securities. Weaver adds, "I don't see why this isn't a political issue given the level of [exploitation] taking place."
John Nester, a spokesman for the SEC, says that these corporate bond mini-tenders "are very problematic from our point of view," and cited a warning on mini-tenders on the SEC'' Web site. He says that "we are continuing to evaluate" this trend, and that the SEC has not determined what, if any, actions should be taken in terms of the rule, or firms that "intentionally abuse it."
A money center bank executive who has dealt with these companies argue that 2001 was perhaps "the busiest year ever in terms of receiving [these sorts of] tender offers," although recent months have seen a "bit of a leveling off in terms of number." Another executive at a bank in New York says that it is difficult to quantify just how many firms there are, speculating that there are 'four to five" with a consistent presence.
One tender offer obtained by BondWeek, was being run by Baseline Investments, a subsidiary of Newport Financial Corporation, according to Lexis/Nexis'Dun & Bradstreet database of listed American corporations and their registered subsidiaries. The tender offered to purchase the IBM 7.25% notes of '02 for 90 on Nov. 20. On that date the bonds were trading at 104.04. Similarly, unlike traditional bond sales, where accrued interest is paid to the seller, the offer notes that "accrued interest is paid to the purchaser." Another feature different from traditional tenders is that the seller cannot cancel the transaction.
Another noteworthy aspect about this tender is that NFC is acting as the information agent for the transaction, a role usually reserved for large, high-profile companies like Georgeson Shareholder Services orD.F. King with a track record of transparency in all transactions. Similarly, NFC appears new to the bond business: Until 1997, the company was a penny stock-trading operation based in Jersey City, N.J., that ran afoul of state securities regulators in several states. Repeated phone calls to NFC/Baseline at its Sarasota, Florida listing were not returned.
One money center bank executive in Charlotte with long experience in dealing with these tenders points to several other operations based in Florida, including SMK corporation and TRC Investments, as also being currently active in these kinds of tenders. Repeated searches of Lexis/Nexis turned up no companies with those names however.