Five-year credit-default swap spreads on Tyco International fattened last week on speculation the conglomerate is going to split itself up. While equity investors reacted positively to the idea, buying up shares, bondholders were more skittish. Tyco protection popped to 95 basis points Monday on news the company's board was planning to vote on a breakup plan, from 68 bps Jan. 6 and 69 bps two weeks before that. Spreads drew in to 79.5 bps Wednesday.
"In other situations where there's a spin involved, it typically is a credit neutral or negative situation," said George Meyers, v.p. and senior credit officer at Moody's Investors Services in New York. Although Tyco's fundamentals and expectations for financial performance this year are positive, the company's stated willingness to consider corporate actions to close the valuation gap and realize more shareholder value may adversely impact debtholders, wrote Meyers, Nov. 23 when he confirmed the Baa3 rating and changed Tyco's outlook to developing.
"I can't see it being positive for debtholders," said Joel Levington, analyst at Standard & Poor's in New York, who placed the name on credit watch negative Nov. 16. "Whether [a sale] will be neutral or negative, I can't say." Eric Ause, analyst at Fitch Ratings in Chicago, said, "The impact of that transaction--if it happens--depends on how they handle that whole process. The board has not indicated it's planning to change its financial policies." Fitch and S&P have rated the name BBB+ since the summer.
