Dana Incorporated (NYSE:DAN) offers to purchase some of its outstanding debt for cash. On Tuesday, March 21, 2017, Dana announced its plan to acquire up to $75MM of its outstanding $450MM 5.375% senior notes due 2021, representing 16.67% of the outstanding notes. Should the offer be oversubscribed, Dana intends to purchase its notes on a pro rata basis. Noteholders have the option of tendering their notes until and including April 17, 2017, but an early tender provision exists, which would greatly enhance the tender offer, as well as potentially nullify any proration. For short-term arbitrage seekers, Dana's tender offer may present an opportunity to capture the difference between the market value of the 5.375% notes and the purchase price.
For each $1,000 principal amount tendered by a noteholder, Dana will pay $1,010.31, but holders have the option of tendering their notes on or before April 3 for an additional $30 per $1,000 principal amount, bringing the total consideration up to $1,040.31. As of this writing, the 5.375% notes trade for $103.75 per $100 principal amount. Though the tender consideration represents a discount to market value of the debt, the early tender premium boosts the total consideration to an aggregate premium for holders that tender before or on April 3. Payment will also include accrued and unpaid interest.
Proration generally presents a big threat to tender participants of both debt and equities. Often times, proration can be so severe that the premium received from tendered shares/bonds does not outweigh the costs of participation. Proration is more likely to occur as the portion of outstanding debt or stock is decreased, and given that Dana is willing to buy back up to a whopping 16.67% of its notes, oversubscription is somewhat unlikely. Furthermore, in the event that the offer goes undersubscribed, as of the early deadline, Dana intends to purchase notes tendered after the early tender date but before the actual deadline in an amount up to the excess of the tender cap over that aggregate principal amount tendered prior to the early deadline, assuming the amount tendered between the two deadlines is in excess of the cap. In such case, holders that tendered prior to the early deadline will not be subject to proration, and all submitted bonds will be repurchased.
In short, Dana's debt buyback presents an opportunity for short-term arbitrage seekers to buy an amount of the 5.375% senior notes and submit them for the tender offer, provided they do so on or before April 3. The early tender premium offered on the notes creates a nice spread versus the going market price for the notes, and proration is unlikely for those that seek to take advantage of this premium, given the likelihood of the offer being oversubscribed by April 17.
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