Capital Markets

Tyco Bondholders Wary of Shortchanging

Guarding against debt redemption at less than the ''make whole'' price.
Dave Cook and Stephen TaubMarch 28, 2007

Bondholders of Tyco International have banded together to help secure the full value of their debt after the conglomerate splits into three companies, according to Reuters.

Such collaboration is common when a bankrupt or financially distressed business is hammering out a reorganization plan, but Tyco is on relatively firmer footing. The company now has a market capitalization of $62 billion, and it reported $41 billion in revenue for its September 2006 fiscal year, although its share price is about half of its pre-accounting-scandal high.

Tyco’s split will be accomplished via tax-free stock dividends to Tyco shareholders, who will then own 100 percent of the equity in the three public companies. The fire and security division, as well as engineered products and services, will remain under the Tyco International umbrella; the new businesses will be named Tyco Electronics and Tyco Healthcare.

Under the reorganization plan covering the majority of Tyco’s roughly $10 billion in debt, reported the Financial Times, the company must repurchase the bonds at full value and distribute all interest payments that would have been made over the life of the bonds in a lump sum called the “make whole” price.

However, “there is a lack of transparency in the process,” Andrew Rosenberg, an attorney for the bondholders, told the FT. Rosenberg, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, added: “We have no idea what they are going to do. We have a general idea about where the assets are going, but we don’t really know where the liability is going.”

Tyco spokesman Paul Fitzhenry reportedly asserted: “Tyco’s bondholders are an important constituency to the company, and we will talk with our bondholders as soon as we can. Because we are currently in the review process with SEC we’re not in a position at this time to discuss any plans for Tyco’s existing debt.”

Bondholders might be concerned, Reuters observed, after the events following the acquisition of Equity Office Properties Trust (EOP) by private equity firm Blackstone Group in February. EOP sought to amend its debt covenants, offering a premium to holders of short-term debt while tendering for the longer-term debt at less than a make-whole price.

EOP’s bondholders opposed the tender offer, the wire service noted. “Structurally there are some similarities to EOP, hence people are concerned that Tyco might pursue the same path that EOP chose, and we have decided to organize early to guard against that,” Rosenberg told Reuters. “Our hope is that if it is in a situation where the bonds should be redeemed, Tyco simply redeems them at the full make-whole price.”