No. of Recommendations: 3
Fools,

I received a notice of tender offer yesterday for my 11 Union Carbide bonds. They were purchased for 88.50 plus interest on 4/7/2010 for a total of $9,761.05. Market value of these bonds today is $11,335.50 with an offer at 103.25 for a YTM of 7.505%. So far I've received only one dividend payment of $426.25.

According to E*Trade, the terms of the tender are:

UNION CARBIDE CORP
CUSIP:905581AS3
CUT OFF DATE:EARLY CUTOFF 03/04/11 LATE CUTOFF DATE:03/20/11
"DUTCH AUCTION TERMS:
HOLDERS CAN TENDER AS FOLLOWS
NOT LESS THAN THE MINIMUM SPREAD WHICH IS 260 per 1000 OR GREATER THAN THE
MAXIMUM SPREAD WHICH IS 290 per $1000. TENDERING NOTES IN THE
TENDER OFFERS IS TO SUBMIT A BID SPREAD THE AGGREGATE P.A.
OF NOTES FOR EACH SERIES TENDERED AT A PARTICULAR BID SPREAD MUST BE IN
AN AUTHORIZED DENOMINATION. THE BID SPREAD THAT YOU SPECIFY FOR EACH
$1,000 P.A.OF EACH SERIES OF NOTES MUST BE IN INCREMENTS OF
1 BASIS POINT. THE AGENT HAS CONFIRMED THAT THE 7.750% DEBENTURES DUE 2096
MAY ONLY BE TENDERED IN DENOMINATIONS OF $1,000 PRINCIPAL AMOUNT AND
MULTIPLES OF $1,000 P.A. IN EXCESS THEREOF THE UNIQUE
DENOMINATION FOR THIS ISSUE OFFER IS SUBJECT TO PRORATION. THERE IS AN EARLY
TENDER PAYMENT OF $30.00.


I think I understand what a Dutch Auction is; but I don't think I have any practical experience with them and I am unsure of what to expect.

I know what a basis point is as well; but I'm unsure how they are applying it in this context. If I understand correctly, they are offering a minimum of 2.60% above par and a maximum of 2.90% above par. That amounts to an offer price of 102.6 to 102.9. If I respond this week, I get an extra $30/bond for a total price of 105.6 to 105.9. Is this correct?

As I understand it, I can state a price anywhere within their range and all bond holders that tender will all get the highest price required to satisfy the terms of the tender.

This bond is rated Baa3 / BBB- by Moody's / S&P. Moody's updated their rating 11/01/2010; S&P last updated on 12/11/2003. That ranks them as bare minimum investment grade - my kind of bond. I assume it's mainly the ultra-long date that pushes the yield up to about 7.5%; but that kind of yield is really hard to replace with any minimum investment grade issue today, so cashing out might mean deploying the funds into another asset class.

BTW, this is a non-callable issue, so there's no chance DOW will turn around and call the issue in the near-term. I'm also fairly happy with the current yield, so I'm thinking about ignoring the tender completely. Alternately I could tender a portion just because this is my single largest bond holding.

I suppose I need to check with DOW to get the exact wording of the tender offer.

Thoughts?

- Joel
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Fools,

I wrote, I suppose I need to check with DOW to get the exact wording of the tender offer.

It appears the details of the tender offer are not available on the DOW website; but there is an announcement here: http://www.businesswire.com/news/dow/20110223006962/en/Dow-A...

The announcement refers to a reference security - the T-Bill that matures 11/15/2040. E*Trade is quoting that security at 94.671875 / 94.765625.

Add 290 basis points and you get a maximum offer of 97.665625 + $30 for an early tender. That works out to a current offer of only $1006.66 per bond.

That's under market (currently 101.375) and far below what I'd be willing to give them up for... Recent trades had them as high as 108.375 - a price I'd probably be willing to accept, but I'd be unlikely to get any time soon.

Unless I misunderstand the tender's terms, I'll be surprised if they are able to actually meet their redemption targets.

- Joel
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Joel, this sort of tender is easy to understand if you are a bond pro and have access to a Bloomberg terminal, and pretty opaque for everyone else. What they are offering is to buy back some bonds based on a yield spread to a reference security, in this case a 2040 treasury. Since I have a bloomberg terminal, I plopped down for 30 seconds and got you the range of tender dollar prices based on the two spreads. 290BPs is equal to a dollar price of 103.07. 260BPs is equal to a dollar price of 107.35. So add 3 points to those prices if you get your response in by the deadline and the firm is offering to repurhase the bonds between 106.07 and 110.35. Note that the offer is only to repurchase a portion of the outstanding debt, so you might get a partial redemption if you choose to play alond.

Were I in your shoes, I would probably submit my 11 bonds with the minimum tender price (103.07). YMMV.
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brewer12345,

You wrote, Joel, this sort of tender is easy to understand if you are a bond pro and have access to a Bloomberg terminal, and pretty opaque for everyone else. What they are offering is to buy back some bonds based on a yield spread to a reference security, in this case a 2040 treasury. Since I have a bloomberg terminal, I plopped down for 30 seconds and got you the range of tender dollar prices based on the two spreads. 290BPs is equal to a dollar price of 103.07. 260BPs is equal to a dollar price of 107.35. So add 3 points to those prices if you get your response in by the deadline and the firm is offering to repurhase the bonds between 106.07 and 110.35. Note that the offer is only to repurchase a portion of the outstanding debt, so you might get a partial redemption if you choose to play alond.

Thanks for the info. I certainly don't have a Bloomberg terminal - I'd imagine that my investments would need to be in the millions to make that worthwhile, yes? I'm not there yet. Indeed, my retirement target is only a little into the 7-figure range and not all of that is going to be in bonds.

I suppose I should have worked out that the yield spread was applied to the effective yield of the reference security and that I'd have to work backwards to calculate an effective offer price.

A price of 106.7 probably might not be enough to get me to play along; 110.35 would. I thought this was mostly behind me. Now I'll probably have to actually do something with this.

I assume if I respond to the tender, I have to submit a price as a basis point spread over the reference security? I suppose that's not too bad really - I guess I just need to figure out at what spread from a 30 year T-Bill is sufficient...

BTW, if anyone wants to actually read the Offer to Purchase, I've posted a copy here: https://docs.google.com/viewer?a=v&pid=explorer&chro...

- Joel
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Joel:

I would call your broker and see how they have it set up for you to submit for the early tender. The reason I suggest putting in for the min price in the range is that you'd have a better chance of getting taken out at whatever the dutch auctioon price turns out to be.

If you have a price in mind that would be acceptable to you let me know what it is and I can tell you what spread that works out to.
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brewer12345,

You wrote, I would call your broker and see how they have it set up for you to submit for the early tender. The reason I suggest putting in for the min price in the range is that you'd have a better chance of getting taken out at whatever the dutch auctioon price turns out to be.

If you have a price in mind that would be acceptable to you let me know what it is and I can tell you what spread that works out to.


Actually I've been too busy to call them today, so it may be too late.

In my limited experience, you usually have to call by like 9-10am of the morning of the cut-off for them to guarantee that they can submit your shares. That gives me tomorrow morning at best.

I was thinking that price might not be that big an issue here. I should be looking at this from a replacement cost standpoint. How much above my replacement cost would incentivize me to tender? Maybe $20/bond over my replacement cost would suffice.

Now what's replacement cost? We're talking something that's minimum investment grade and long or very-long dated. I don't need to know the price for that - I just need to know the yield.

As I understand it, the price Dow is going to pay is equal to the current yield of the reference treasury + [260 to 290] basis points. According to E*Trade, the reference Treasury is yielding 4.631%, so the offer range's yield is [7.231% - 7.531%]. To calculate the price you receive, you take the terms of the tendered bond and work backwards from that yield to get a price. [Add $30/bond for the early tender.]

But I have ask, Can I get a good replacement? Actually, it looks like I might be able to purchase acceptable replacements in the 7.2% range, though I might have to dig as low as 7% - it's hard to tell given what's left on the quote screen after hours.

So if my [new] interpretation is correct, I should be able to do as you suggest and simply tender. The current offer spread is acceptable in that it appears to be in the range of comparable market securities. [This assumes the market spreads don't widen while I'm waiting for my bonds to be redeemed.] I'll also pocket an extra $330 in bonus cash. So regardless of the ultimate price, I suppose I should accept.

- Joel
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brewer12345,

You wrote, I would call your broker and see how they have it set up for you to submit for the early tender. The reason I suggest putting in for the min price in the range is that you'd have a better chance of getting taken out at whatever the dutch auctioon price turns out to be.

I have to admit, I had a bit of a "DOH!" moment this morning while I was in the shower.

I'd skimmed through the first part of the Offer to Purchase document and had actually called E*Trade and submitted my order to tender the bonds with a Clearing Spread of 270. Then in the shower I realized that I was looking at this backwards and felt kind of stupid.

The Offer to Purchase breaks the spread into two parts and it does this for very good reason - which it actually explains further down in the document. The first spread is the Base Spread, which is 290bps in this case. That number is fixed. The second spread is the Clearing Spread Premium, which is the number you submit. The maximum Clearing Spread Premium is 30bps.

Base Spread - Clearing Spread Premium = Clearing Spread.

As everyone here knows, yield and price have an inverse relationship in secondary market bonds. Same goes with the Clearing Spread. The higher it is, the lower my price! DOH!

What was I thinking? I was shooting for a yield that would be a little OVER what I could buy an acceptable replacement for - I should have been shooting for a yield UNDER what I could find as a suitable replacement!

Now I have to decide whether or not a clearing spread of 270 is really acceptable. In reality 260 gets me a yield that I can just barely replace. It will be hard to get an equivalent yield in a BBB- issue I like, but I'm fairly confident I can do it. $30/bond just makes it worth my time.

I haven't done the math, but accepting a Clearing Spread Premium of 20bps probably erodes half of that bonus money. At that point, is it worth my time? Should I withdraw my acceptance? Should I change my offer? I'm not sure. Obviously if other bond holders believe the same as I do, they won't accept less than a 30bps premium; however, I'm looking at retail bond prices - an institutional bond holder might see the 0bps Clearing Spread Premium as a good deal simply because he's getting better pricing for replacement bonds.

Thoughts? [I'm probably going to make any decision to change the order in the next hour...]

- Joel
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Personally, I would submit at the lowest tender price and hope to get taken out higher via the dutch auction process and be happy with the capital gain. Then again, I would never have bought an 85 year maturity in the first place, so WTFDIK?
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brewer12345,

You wrote, Personally, I would submit at the lowest tender price and hope to get taken out higher via the dutch auction process and be happy with the capital gain. Then again, I would never have bought an 85 year maturity in the first place, so WTFDIK?

Well in that case you'd bid 0 on the Clearing Spread Premium...

I bid 20. Actually, I've been busy at work and haven't had time to think about this anymore. So the deed is done. My only option now would be to withdraw completely; but I don't think the tender offer is that bad, so if I only get the 270, I'll take what they give me.

And if you're holding long-term bonds and you're happy with the issuer's fundamentals, what difference does it make if they're long or ultra-long? I mean if the company goes south - it's probably not going to happen on your schedule. I figure that if I'm going for 30-year bonds, I'll be lucky to see them mature. Why not garner a little extra yield now and let my kids worry about it when I'm gone?

I mean it's not like I'm going to have my entire portfolio in ultra-long bonds... And I'm hoping I'll manage my money well enough that I'll never spend my last dime.

And hey! I will have made over 30% in one year on this issue. Not bad money on a bond. And only about a 2% move in YTM to boot! Image that...

BTW, were you around this time last year when I bought these things? http://boards.fool.com/union-carbide-bonds-28430454.aspx?sor...

- Joel
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I guess I have a couple of problems with very long term maturities:

1) the risk of a bout ofhefty inflation/a rate spike is a lot higher over 30+ years than over 5 to 10. With a shorter maturity you also claw back toward par quicker as the bond creeps to maturity.

2) the risk that the issuer will blow up is greatly magnified over longer time periods. I can usually do credit work and get comfy with a company's ability to make it for 5 or so years. Much beyond that is generally a guess.

So I like to keep it shorter when buying individual bonds, the more so as you go down the credit quality scale. I will happily buy junky junk (at the right price) if you can get comfy with an issuer's ability to stay alive and my recovery in bankruptcy is equal to or better than my entry price. But the timeline over which I can do that with any confidence is a lot shorter than 30 years.

I was around a year ago. I was buying with both hands (and even borrowed money) in the first half of 2009, but I liquidated the bulk of my positions last year at fat capital gains. Currently down to one individual bond that is quite illiquid and not eager to jump back in the pool at current values. Then again, I get a lot more interested when bonds are quoted at dollar prices rather than spreads and yields.
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Fools,

It looks like my offer price was accepted. E*Trade has already swept the bonds from my account and put a place-marker into the account in their stead. I suppose the funds will show up in a few days.

Here's today's announcement from Dow about the tender: http://www.businesswire.com/news/dow/20110309006086/en/Dow-A...

It appears Dow received an offer for $1.7B of the bonds in the first pool. They were planning on purchasing $400M. They decided to increase their offer to purchase $1.2B. (Only about 1/3rd of the Union Carbide bonds were tendered.) I suspect my ask was near their high price ... not that it would have mattered much in a Dutch auction; but I also suspect they could have satisfied their original $400M with their minimum spread.

- Joel
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