Corporates hand over cash to bondholders

(Fixes typo in para 4, clarifies quote in para 5)

* Negative yields turn debt world upside down

* Corporates use excess cash to cut debt piles

By Helene Durand

LONDON, June 17 (IFR) - Rather than being charged to keep money on deposit, some European corporates are electing to buy back bonds even at negative yields in an unintended consequence of the European Central Bank's monetary policy.

The ECB's desperate attempts to spur inflation by cutting rates deeply below zero are putting such a strain on balance sheets that corporates would rather spend cash on costly liability-management exercises.

Earlier this month, French auto maker Peugeot (Other OTC: PUGOF - news) was the first sub-investment grade corporate to announce it was buying back debt at a negative yield.

Ireland (Other OTC: IRLD - news) 's Dublin Airport Authority and Electricity Supply Board and France's Fonciere des Regions (LSE: 0J6V.L - news) had earlier bowed to the ugly new reality by buying back negative yielding bonds.

"We thought corporates would draw the line at buying back bonds at 0%  but we've seen four issuers [buy back bonds at negative yields] now," said Vijay Raman, head of liability management at Societe Generale (Swiss: 519928.SW - news) .

He said issuers were not normally comfortable paying more to investors than is due to them in the form of all future coupons and principal.

While corporates usually have no hard floor under which they cannot buy bonds back, 0% is an internal limit used by many as a discount rate.

"But they would lose even more if they left this cash on deposit," he said.

The ECB cut its deposit rate in March, lowering it another 10bp to minus 0.4%.

"The definition of what excess cash is is changing as reinvestment opportunities diminish. But [buying back negative yielding bonds is] difficult to grasp from an economic perspective, and it basically suggests that you have nothing better to do with that cash," said a senior liability management banker.

Negative yield buybacks are still relatively rare, but many corporates have bought back bonds at zero yields, or at a discount to market price.

Corporates have accounted for two-thirds of liability-management deals done in Europe so far in 2016, according to SG data.

The universe of negative yielding bonds continues to grow as quantitative easing expands into the corporate asset class.

Around 16%, or 423bn, of the 2.6trn of corporate bonds now yield less than zero, according to Tradeweb data.

"Issuers used to have to offer a premium to buy bonds back in the past but what we're finding is that the market has got so tight, you now find liability-management exercises with reference to 0% yields," said a head of liability management.

"At 0% it's a new paradigm to take on board, which is interesting but also quite depressing."

SLASHING DEBT PILES

While some of these tenders may seem like the debt world has been turned upside down, it has actually been positive for companies that are reducing their debt.

"Corporates don't have capex, GDP growth is struggling to reach 1% and there is general overcapacity in the system," said Raman.

"If they sit on cash for too long, shareholders will demand for that cash to be returned to them so liability management is a good way to address this."

CONSERVATIVE

Unlike in the US, where share buybacks and M&A activity have been more common, European firms have been more conservative and looked at cutting debt instead.

"Issuers can deploy available liquidity to reduce their short-term refinancing risk and, at times, contain or remedy ratings," said Stelios Manetas, head of liability management at BNP Paribas (LSE: 0HB5.L - news) .

Anglo American (LSE: AAL.L - news) , Rio Tinto (LSE: RIO.L - news) , and Arcelor were among the wave of hard-hit credits desperately trying to reduce their debt burdens.

"For a borrower like Anglo American, they wanted to efficiently use their strong liquidity position to reduce gross debt and smooth their debt maturity profile while improving cashflows by reducing interest expense. It (Other OTC: ITGL - news) was similar for Arcelor and some of the other miners," said Manetas.

And beleaguered French retailer Casino bought back 537m of debt, its first step in trying to shrink a debt mountain that put the issuer in the market crosshairs at the end of last year. (Reporting by Helene Durand, Editing by Alex Chambers, Julian Baker, Matthew Davies)