Tyco to pay bondholders $250 mln to settle suit

By Dena Aubin

NEW YORK (Reuters) - Tyco International (TYC.N) said on Friday it has agreed to pay bondholders $250 million under a preliminary settlement of a widely watched dispute over its restructuring into three separate entities last year.

Debtholders have agreed to dismiss their lawsuit and waive any alleged default, Tyco said in a statement.

Some analysts saw the settlement as setting a bad precedent in the corporate bond market.

"It may appear a (bondholder) win, but in terms of relative economics, it is a loss since it sends a message that bondholders will blink and the process of organizing investment-grade bondholders to fight is simply too cumbersome," said Glenn Reynolds, senior analyst and chief executive of independent research firm CreditSights, in an e-mailed message.

"Basically, bad behavior was rewarded," he said.

The lawsuit was widely watched, because it highlighted that investors may not be as protected as they think against corporate restructurings that can hurt the value of bonds.

The Bank of New York (BK.N) -- the trustee for Tyco's bonds -- and a group of bondholders had sued Tyco, arguing that the company broke terms and conditions of its debt by spinning off its electronics and health-care divisions last year into independent companies.

The plaintiffs said the company did not get the proper approvals before the spin-off, which harmed debtholders because the majority of the assets supporting their debt was transferred to new entities.

Tyco could have pressed its case in court, but any victory in the lawsuit may have forced the company to pay up the next time it tried to tap the corporate bond market, people familiar with the matter said.

Maintaining access to debt markets is particularly important during the current credit crunch, which has given investors much more leverage in negotiating terms with companies issuing bonds.

A spokeswoman said Tyco views the settlement as reasonable and resolving the suit "in a timely fashion was in the best interests of everyone involved."

EXCHANGING BONDS

The agreement was reached with firms that advise holders of about 80 percent of Tyco's $3.7 billion of outstanding debt. The settlement is contingent on more than half of the bondholders of each issue agreeing to it.

Both the plaintiffs and Tyco had asked for an immediate judgment in the lawsuit, but last month, U.S. District Judge Shira Scheindlin rejected those motions.

As part of the proposed settlement, Tyco said it is also offering to exchange its notes due in 2028 and 2029 for notes maturing in 2019 and 2021, respectively.