Batelco, the leading telecom service provider in Bahrain, plans to buy back a third of outstanding bonds due in 2020, using excess liquidity from a scrapped acquisition to lower its debt servicing costs.

The company has offered to buy back up to $200 million in principal amount of its 4.25 percent, $604.4 million guaranteed notes maturing in 2020, with the price being determined through a modified Dutch auction process.

The notes rallied by nearly 2 points after the tender was announced on Monday, with the minimum purchase price set at $970 per $1,000 of principal tendered. The bonds were trading at a bid price of 98.013 as of 1020 GMT on Tuesday, according to Tradeweb, up from 96.25 just before the announcement on Monday.

Richard Segal, a fixed-income analyst at Jefferies, said the deal will be mutually beneficial for the company and bondholders.

"Investors will gain to the extent they will have liquidity from the company at a certain price, whereas Batelco could benefit, albeit slightly, from the opportunity of buying back the debt at a little below par," Segal wrote in a note to clients.

"In addition, there will be the conceptual benefit to bondholders from the signal spare liquidity will be utilised to reduce gross debt, as opposed to considering other growth opportunities," he added.

The buy-back is not expected to strain Batelco's liquidity position, as the company reported cash reserves of BD199 million ($522 million) at the end of 2013, more than double the BD99 million held at the end of 2012.

Batelco began buying back its 2020 notes, through which it originally raised $650 million, in November. The company's annual results show $39.5 million worth of the notes was bought back as of Dec. 31.

Batelco reversed its $100 million acquisition of a 25 percent stake in Compagnie Monegasque de Communication from Cable & Wireless Communications at the end of December, as the deal ran into regulatory problems.

At the time, Batelco said the two parties agreed to reverse the sale as CWW did not expect to win the necessary approvals by April.

Results of the bond tender will be announced on April 1, with the transaction slated to close on April 4.

Citigroup and Standard Chartered Bank are the dealer managers on the tender offer. – Reuters