Risk & Compliance

Tyco Noteholders Send Warning

The conglomerate's breakup could be stalled by bondholders who claim that they are not getting a fair shake.
Stephen TaubJune 15, 2007

An ad hoc committee of Tyco noteholders is threatening to delay the company’s plan to break up into three companies, slated to happen later this month. In a letter fired off to the conglomerate’s board of directors, the group said the plan, which calls for Tyco to spin off two companies, could be delayed because of the company’s failure to fulfill its obligations to its bondholders.

“The Committee has no interest in delaying or obstructing the break-up transaction,” the investor group said in the letter. “However, recent actions by Tyco have increased the likelihood that such a delay will occur.” Tyco plans to separate into three companies — Tyco Healthcare, Tyco Electronics, and Tyco International — on June 29.

The bondholder group holds a majority of the notes issued by Tyco International Group and guaranteed by the parent company, Tyco International Ltd., under 1998 and 2003 note indentures. In the letter, the committee asserts that Tyco failed to obtain required bondholder consents for the proposed breakup of the company and instead attempted, unsuccessfully, to coerce the bond investors to accept less than the full amount of money owed to them.

“Tyco’s management and [b]oard have made substantial progress over the past several years in helping the company recover from the darkest chapter in its history,” the letter states. “We now hope that you will recognize that instructing the company to honor its obligations to the pension funds, insurance companies and other financial institutions that have lent it money is in the best interest of Tyco and all of its stakeholders.”

In response, Tyco said it does not expect any problems completing the planned breakup. “We have honored our obligations to our bond holders,” Tyco spokesman Paul Fitzhenry told Reuters. “We made a fair offer during the tender process and we are now proceeding to complete the separation of Tyco into three separate companies at the end of this month.”

Fitzhenry added that both the Tyco board and the Securities and Exchange Commission approved the transaction last week, and shares in the three companies began trading Thursday on a “when-issued basis.”

But the noteholders view the situation differently. The investors claim that when they invested in Tyco, they agreed to lend to the company billions of dollars at fixed rates of interest, in some cases for up to 30 years. As part of that deal, the noteholders and Tyco agreed that if the company wanted to change its business, and the change meant that the company could no longer abide by the terms of the indentures, Tyco could redeem the notes at a preset price.

The noteholders argue that the breakup will cause a significant change. Indeed, the group contends that they lent money to a diversified conglomerate, with a market capitalization that has mushroomed to $65 billion. But after the breakup, they will be lenders to a new entity holding just a few of the conglomerate’s business lines and a fraction of the assets.

“Once the break-up was announced, Tyco was expected to honor its end of the bargain and redeem the [n]otes at the preset price,” wrote the bondholders. The letter claims that Tyco has reneged on the redemption agreement and instead has resorted “to a form of coercive tender and consent in an attempt to force the [n]oteholders to consent to the break-up and tender their [n]otes at less than the agreed upon redemption price.”

According to the letter, The Bank of New York, the indenture trustee for the notes, has initiated a court proceeding seeking a ruling as to whether the breakup violates the indentures. The bondholders admit that the court action could delay the proposed timing of the breakup. “A multi-billion dollar judgment in the [n]oteholders favor would obviously have an impact on Tyco’s future as well,” the investors warn.

4 Powerful Communication Strategies for Your Next Board Meeting