Tyco to pay bondholders $250 mln to settle suit

By Dena Aubin

NEW YORK (Reuters) - Tyco International (TYC.N: Quote, Profile, Research, Stock Buzz) 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: Quote, Profile, Research, Stock Buzz) -- 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.