Such offers are allowed under a provision of the relevant debt issues called an 'accordion feature' – which says the company can issue additional senior debt and relegate existing bondholders to a more junior position in the capital structure.
These offers are expected to become more widely used as the economy contracts and the credit markets remain closed to heavily indebted companies.
Most bondholders are expected to sign up for these deals because they are so concerned about the health of issuers like Realogy, a real estate brokerage taken private by Apollo, or Harrah’s, a gaming company owned by Apollo and TPG.
Realogy is giving bondholders the chance to own a low priority claim worth 100 cents on the dollar or a higher priority claim worth only 50 cents on the dollar. The Harrah’s deal is similiar but its terms are more complex.
Investors are tempted to accept such offers because most bonds are considered unsecured, which means holders lack a specific claim on assets. Recoveries for debtholders at the bottom of the capital structure of heavily indebted companies that file for bankruptcy protection have dropped to under 20 cents on the dollar.
Some investors speculate that private equity firms will be forced to put more equity into their troubled companies to avoid the perception that they are harming creditors to protect themselves.