Bond Calls, Credible Commitment, and Equity Dilution: A Theoretical and Clinical Analysis of Simultaneous Tender and Call (Stac) Offers

Abstract

This paper investigates, from both a theoretical and clinical perspective, bond tender offers accompanied by a threat to call nontendered bonds, or so-called STACs. The theoretical analysis explains the use of STACs and derives conditions under which the call threats embedded in STACs are credible. These conditions relate to the degree of bondholder coordination, and the relative costs of adverse selection and suboptimal call policies. Next, three cases of actual STACs-James River, May Department Stores, and Houston Power and Light-are investigated. A rough correspondence between the evolution of these STACs and the different strategic equilibria of the model is established.

JEL Classification: D82, G33