it’s 1982. US treasuries are yielding 13%.
bonds are trading at a huge discount.
you’re exxon.
you have excess cash.
you issued bonds in the good times.
and now you want to buy your bonds back in the 60’s.
but most investors account for the bonds at book value (cost).
selling them to you would trigger a writedown and getting yelled at.
so you’re stuck.
“why couldn’t you just ‘make-whole’ these bonds” you ask?
(the standard option of buying back a bond very early at a yield close to treasuries)
because it’s 1982.
make-wholes were born in the mid 90’s.
“you can’t do that”
exxon might give up on it.
but then a guy at morgan guaranty trust comes up with a solution.
defeasance.
retiring the bonds by way of buying and setting aside enough US treasuries to cover the bonds.
the nuclear option.
exxon defeases its 515mm of bonds for 60 cents on the dollar in treasury bonds.
then every company wants to know what this newfangled defeasance thing is.
nothing new under the sun.
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