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The debate over whether Tyco International should take out its remaining US non-convertible notes could risk stalling the separation of the company, the ad hoc Committee of Tyco noteholders said Thursday.
Last Friday, Tyco announced the approval of the distributions of all the common shares of its electronics and healthcare businesses called Tyco Electronics and Covidien – two of the three publicly listed companies that will be formed from the separation of Tyco International – to the shareholders of Tyco. The distribution of common shares of Tyco Electronics will occur on 29 June by way of a pro rata dividend to its shareholders.
The remaining debt would stay within the new Tyco as part of the separation, which encompasses the fire and security and engineered products segment.
However, an argument being presented by an ad hoc committee of dissident bondholders could still risk holding up the separation, the ad hoc committee confirmed Thursday in a statement. The committee – that started litigation against Tyco in mid-May – is claiming that the make-whole premium offered in the company’s recent tender offer fell short of the premium the company was obligated to offer bondholders as per the indentures.
Thursday’s statement from the noteholders said the Indenture Trustee for the Notes - The Bank of New York - has commenced a court proceeding seeking a ruling as to whether the break-up violates the indentures. The noteholders are confident that the court will rule in their favor, according to the letter. This court action could very well delay the proposed timing of the break-up. A multi-billion dollar judgment in the noteholders favor would obviously have an impact on Tyco’s future as well, the letter went on to say.
One source close to the situation said this week that there is “no desire” for Tyco to redeem the remainder of its US non-convertible bonds totaling around USD 3.7bn. He explained that the tender offer period for bondholders ended on 24 May, and that redeeming the rest of the debt is not contingent on proceeding with the separation of Tyco International. “People had their chance, it is over and settled,” the source said.
The Treasuries+ 60bps make-whole premium Tyco offered as part of the tender offer is an optional redemption provision for the issuer, sources familiar with the situation said. It allows the issuer at its complete discretion whenever it wants to issue a call notice and buyback all the bonds at a predetermined level. Therefore, the first source said what is confusing is how that call provision became a put right.
“All it says is this is a price that Tyco, if it wants to call the bonds, is the price it can call the bonds. It doesn’t say anything about a contractual obligation to bondholders when seeking to buyback their bonds,” the first source said.
There is a successor obligor clause under Tyco’s indentures that also maintains if a company can transfer, convey or hypothecate, ”all or substantially all” of its assets, the bonds have to follow, the source pointed out. He said in this case what is unclear is what constitutes “all or substantially all”.
In the offer Tyco asked for consent on the ”all or substantially all” clause, but did not believe the separation is prohibited by the indenture. A majority of the bondholders have now turned to the Bank of New York to hold off on signing supplemental indentures. On 4 June, BONY brought the action to a New York district court seeking a declaratory judgment to determine whether execution of the proposed supplements is permitted or authorized by the indentures.
Tyco needs to respond to the complaint by 25 June, according to the docket. “That doesn’t mean by any stretch that the court is going to rule, that just means that is when the papers are due,” the source said.
But at this point the source said Tyco does not need further consent, adding: “I haven’t seen anything from any court that would suggest that they are going to do anything to hold up this operation.”
However a second source close to the ad hoc committee – composed of some of the largest US insurance companies and asset managers – said he believed their consent was necessary in order for the transaction to be completed.
On 25 May, the company announced that as of the expiration of the consent solicitation, 33.67% of the non-convertible notes outstanding under the 1998 indenture and 34.39% of the non-convertible notes outstanding under the 2003 indenture had tendered their securities and executed the consent sought by the company. The first source described these figures as “substantial”; nonetheless, the second source disagreed. He said that figure was irrelevant, and that Tyco needs 51% under the indentures.
The second source said he was doubtful that Tyco would be able to prepare a response to the court in the given time frame. “It’s an incredibly complex, factual situation to try to convince any court to get the deal in two weeks and really give it much choice of a ruling in their favor. It would be extraordinary,” this source commented.
He said the company would have to drastically reorganize the structure that they have played out to date to not require the Trustee signature in order to effectuate the transactions.
Darren Hensley of Hensley Kim & Edgington and co-author of ”Successor Obligor Clauses” said in terms of the successor obligor clause, the courts have been fairly clear that if bondholders want a restriction of some sort on the company, their protection was the indenture and it should have been negotiated up-front.
He said courts have typically taken the position that, whatever the answer is on “substantially all the assets,” then the indenture goes with it, and vice versa. “If a more restrictive covenant wasn’t sought, you’re kind of stuck under the successor obligor clause,” Hensley said.
But the real issue in this type of situation boils down to is what “substantially all” the assets are, he said. “Whatever a court decides where substantially all the assets went is where the bonds are going to go and there’s not a lot you can do about it other than be a thorn in their side,” he said.
As with the lawyer, Hensley explained that the next logical play would be to file a suit for an injunction for violating the assets clause transfer among other possible claims.
The second source said that Tyco is holding steadfast and has not demonstrated any room for negotiation with the committee. But he pinpointed that the company may need to evaluate the longer term ramifications of its actions as an investment-grade company, particularly when trying to tap the public markets for financing.
“You are going to find that the anger goes far beyond this group, that this is an investment grade company and they are expected in the financial community to act a certain way,” the second source said, adding: “You are going to hear from bondholders that the long term damage of their credibility to the public markets.”
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