Investors to continue support for bond buybacks

"For an investor there are certain attractions," said Robin Creswell, managing principal at Payden & Rygel . "It creates liquidity in a way that's convenient for us, to sell bonds out of our longer-dated accounts and buy others."

He sees this additional liquidity as particularly helpful in the run-up to year-end as market activity reduces, suggesting support for buybacks will continue.

In the last few weeks there has been a raft of offers from consumer names such as Marks & Spencer , Danone , Tate & Lyle and BAT to buy back short-dated bonds with a view to issuing longer-dated bonds to reduce refinancing risk.

Dutch Chemical company Azko Nobel announced a similar liability management exercise on Wednesday.

It is a trend that is likely to continue as treasurers seek to cut their reliance on bank funding, with analysts at BNP Paribas suggesting other buyback candidates may include Kingfisher , Heineken and Imperial Tobacco .

European corporates have issued record amounts of bonds this year at over 284 billion euros (258.8 billion pounds) -- a 50 pct increase on the previous high recorded in 2001.

"It's a good environment for almost any company whatever their credit quality to come to the market," said Creswell.

In some cases, the lower the credit quality, the more attractive it might be: "With a higher credit quality company, there is more liquidity and the bid/offer spreads are less."

Companies making a tender offer pay a premium to take bonds out of the market, but this is not necessarily the big draw, say investors.

"The amount of money you can make is small relative to the overall spread volatility in the market," said Jamie Stuttard, head of European and UK fixed income at Schroders .

Other investors argue that the value is not all in the price, but also in what they can do with the money if they can sell certain bonds.

"You might be offside against book value but it gives you the opportunity to invest the proceeds elsewhere more attractively," said Eric Holt, head of credit at Royal London Asset Management (RLAM).

Neither do investors want to be left holding the rump end of an issue that becomes illiquid and pulls out of the benchmark.

"If it's a sub-one year bond you would probably be happy enough to let that run until maturity, but a 2, 3 or 4 year issue can become illiquid pretty quickly," said Robin Green, head of credit trading at JP Morgan Asset Management .

Investors said they were unlikely to try to position for potential buybacks, because of the difficulty of picking the right name and the part of the curve that the company will want to take out.

Sajiv Vaid, a fund manager at RLAM, pointed out that there was not much value in this anyway. "If you tried to do that, you'd be buying very short-dated bonds with maybe an upside of 20 basis points ... and 20 basis points won't make your year."

He added that the premium to buy back bonds may reduce as tender offers become more common but to go longer investors may start to demand a greater premium.

(Editing by David Cowell)