Tyco bondholders file lawsuit against Tyco International

Thursday, June 28, 2007

NEW YORK--Saying Tyco's planned spin-off of two businesses violates the conglomerate's contractual obligations to them, a group of Tyco bondholders on June 25 joined a lawsuit against Tyco International.
The bondholders took this action just days before Tyco International intends to spin off its health care business (called Covidien) and its electronics business (called Tyco Electronics). The remaining entity, Tyco International, is the umbrella for its security and fire businesses. The break-up is scheduled to become effective June 29.
"We don't know yet when it will be heard in court, but we do not expect that to occur before the scheduled closing date [of the break-up]," said Michael Freitag, spokesman for the bondholders group.
The bondholders' complaint was filed in the U.S. District Court of the Southern District of New York. The group includes Unum Life Insurance Company of America, New York Life Insurance Company, Provident Life and Accident Insurance Company, among others, and they collectively own more than $2.7 billion in notes. Their complaint joins a lawsuit filed earlier this month by The Bank of New York, the indentured trustee, who is the party responsible for safeguarding the provisions of the bond agreement.
In a statement, the bondholders said they lent money to a conglomerate which has a market capitalization of $65 billion, but after the break-up, they will be lenders "to a new entity holding just a few of the conglomerate's business lines and a fraction of the assets ... this is not what the noteholders bargained for when they purchased billions of dollars from Tyco." As part of the lending agreement, "Tyco agreed that if Tyco wanted to change its business such that it could no longer abide by the terms of the indentures, it could redeem the notes at a preset price, namely the outstanding principal under the notes plus accrued interest and the make-whole premium."
Paul Fitzhenry, Tyco spokesman was not immediately available for comment on June 27. However, in a Reuters news report Fitzhenry said that Tyco had honored its obligations to bondholders and made a fair offer.
While he does not believe anything will be resolved before Friday's planned spin-off date, Freitag said, "The bondholders believe there are repercussions to Tyco if they complete the transactions without addressing this issue."
"The bondholders believe there is an important legal principal at stake here," Freitag said, also noting that the rest of the financial world will be watching this case. "Recently companies have felt emboldened to change the terms of debt agreements without the consent of bondholders. The bondholders believe this is an important test case for this."