Tyco sets new example for conglomerate bondholders

September 19, 2011

By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Shareholders appreciate a good breakup story and Tyco is giving them more to love. The industrial manufacturing group dismantled itself into three parts in 2007. Now, one of them, Tyco International, is being carved into three more pieces. The company’s shares gained on Monday amid a broad market selloff. But while equity investors often see value in a less sprawling conglomerate, the same isn’t always true for bondholders.

Corporate debt is often an afterthought in breakups, or worse, a tool to help one unit look better at the expense of another. Tyco knows. Last time around, an ugly fight with creditors ensued after it tried to buy them out on the cheap, nearly derailing the dismantling. This time, it is paying them more heed.

Other lenders haven’t fared as well. Sunoco, for example, retained some $3 billion of investment-grade borrowings when it spun off its coal mining subsidiary. Now, the debt is rated junk and the company is scrambling to exit the refining business.

Meanwhile, at Dynegy, creditors are in a pitched battle with activist investor Carl Icahn, over a split of sorts. The company transferred assets away from the holding company and, importantly, out of the reach of bondholders should Dynegy ever stumble into bankruptcy — something management warned was a real danger before Icahn acquired a significant minority stake.

Tyco seems to have learned a lesson. In addition to historical image problems created by former boss Dennis Kozlowski and his $6,000 shower curtains, the company alienated debt investors four years ago. This time, by promising to redistribute $4 billion of borrowings relatively fairly among the residential alarms, pipeline widgets and fire and security units to retain their investment-grade status, Tyco seems to be going out of its way to keep bondholders on its side.

Investors in other conglomerates may not be so lucky. Over 60 companies have announced spinoffs this year and more seem destined to come. Weak debt covenants held over from the boom —¬†and more recent ones — mean bondholders should be mindful of their vulnerability amid breakup fever. Tyco’s got a second chance. Others may not.


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