Frequently Asked Question – Bond Tender Offers

Given our philosophy to invest in individual bonds for the fixed income portion of portfolios, we receive tender offers for bonds held in client portfolios on a regular basis. With the decline in interest rates over the first six months of the year, we have seen an increase in these offers and calls from clients concerning any actions they should be taking in response to the offers. We wanted to take this opportunity to explain what can be a fairly complex transaction. A tender offer is when a company offers to repurchase some, or all, of a bond issuance before the stated maturity date. The purpose is to retire bonds issued at higher rates to cut costs. While doing so may be prudent for the issuing company, rarely, if ever, do we find tender offers to be in the best interests of existing bondholders. When a bond in your portfolio is up for tender, you will receive a notice from the brokerage firm with the offer terms, including the size of the offer and the deadline for electing to participate. Issuers will often include an “early tender premium” in their offer – e.g., $20 for every bond held, in $1,000 increments – as a way to entice participation. While 2% (or $200 on a $10,000 position) may sound appealing, you have to weigh this against the cost for participating in the offer and the potential opportunity cost of lost future income. Typically the price you receive through the tender offer, which won’t be known until a future date, ends up being very close to what we could sell your bond for on the open market. In addition, we may not be able to replace the income from the tendered bond depending on prevailing interest rates. In short, issuers are likely doing this for their benefit, not for the benefit of bondholders. Our fixed income department receives these same tender notices and we analyze every offer on its own merit. If at any point we determine that it is beneficial to participate, we will take action on your behalf. Otherwise we will decline participation by taking no action, as indicated on every notice. If you have questions, or would like more information, please contact your Relationship Manager here at West Financial Services Disclosures

• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. West Financial Services can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
• These materials contain references to hypothetical case studies. These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person. Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics.