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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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July 16, 2007 12:01 AM ET
Bloomberg
PROMISES, PROMISES CEO Ed Breen claims Tyco fulfilled its obligations.
Nowhere is that clearer than at Baa1-rated Tyco, whose investment-grade type of indenture has forced bondholders to go to court in hopes of stemming losses from a spin-off that effectively strips their holdings of much of their underlying assets. Whether Tyco bondholders will be successful remains to be seen. High-grade bondholders, to be sure, have become more demanding in the past year, seeking and in some cases receiving at least some protection against losses they incur from transactions such as leveraged buyouts. That protection has typically come in the form of change-of-control covenants that force a company to buy back bonds at a premium if it is acquired and downgraded to junk. But change-of-control covenants haven’t paid off yet. And while most companies that agreed to them haven’t been bought out, the covenants haven’t prevented issuers from boosting stock prices through stock buybacks or dividends funded with debt, which have also hurt bondholders’ interests. And with concern rising over potential defaults, investors have headed for the exits. At Tyco, many bondholders have instead headed to court, as a much more boilerplate covenant typical of high-grade corporate bonds so far hasn’t worked in their favor. Called the “successor obligor” clause, or merger covenant, it stipulates that if a company transfers “all or substantially all” of its assets to a successor entity, that entity must assume the debt obligations of the company. “This covenant in particular is very typical,” said Alex Dill, senior covenant officer at Moody’s Investors Service. “With the obligator clause, they want to make sure that the successor entity is going to have a similar credit profile.” But as with other covenants “in the investment-grade universe, there’s nothing really that’s got much teeth,” Mr. Dill added. As a result, Tyco’s bondholders sued the company at the end of June for alleged infringement of that merger clause. Tyco said at the beginning of last year that it would split its company into three, a health-care company called Covidien, an electronics business dubbed Tyco Electronics and a fire, security and engineering products company called Tyco International. The split went into effect at the end of June. But Tyco’s remaining debt of around $3.7 billion, from borrowings in 1998 and 2003, stayed with Tyco International. With fewer assets backing the bonds, such a weakened company has the “bleakest prospects of growth,” according to bondholders, who want their money back and are concerned about losses. They also fear Tyco could soon fall into the hands of private equity firms, which would further damage the value of their holdings. Tyco offered to buy back the bonds in the spring, but at a below-contract price, meaning lower than the make-whole price bondholders requested. The make-whole price represents the net present value of the bonds plus interest payments through the scheduled maturities. The longest bonds mature in 2028. Some bondholders agreed to sell them back, while others—mostly life insurance companies who control over $2.7 billion of the notes—joined forces and sued, asking for a declaratory judgment that the company’s asset-stripping transaction was unlawful and in violation of the indenture. The case will center on what exactly constitutes all or substantially all assets and whether the assets that were transferred represent all or substantially all assets. Views diverge on that second question. In the lawsuit, bondholders claimed that 66% to 80% of the company’s assets were spun off, which it considers all or substantially all assets, leaving only 20% to 34% of assets at Tyco International to support the notes. Bondholders said in the complaint that by relying on book value, the company previously argued that only 53% of the company’s assets were spun off. “Our position all along has been that Tyco has honored its obligation to bondholders,” said Paul Fitzhenry, spokesman for Tyco. “We made a fair offer to bondholders during the tender process.” The spin-off has already closed and cannot be reversed. But bondholders are hoping to recover all of their money and at the same time strike a blow for bondholders in the investment-grade market. If they lose, it will open the door to similar abuses from other bond issuers, particularly those controlled by private equity firms, analysts contend. “The entire high-grade market is standing by wondering how much new structural risk will be injected into their markets by the de facto gutting of the merger and sale language,” said Glenn Reynolds, analyst with CreditSights, in a report. “Private equity investors, investment bankers and M&A lawyers are also standing by waiting to cry into their Hamptons cocktails or break into multiple celebrations."
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