FIN 413 Professor Clifford W. Smith Jr. Corporate Financial Policy Spring 2007 ARTICLES PACKET Debt-Driven Deals Shake Up Holders of Highly Rated Bonds Karen Richardson and Serena Ng. Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 8, 2007. Abstract (Document Summary) On Dec. 26, before Vornado appeared on the scene, EOP and Blackstone announced plans to buy back all of EOP's $8.4 billion in bonds as part of the Blackstone buyout. The offer covered short-term bonds due within the next 10 years and longer-term bonds due as late as 2031. But debt investors rallied against it, rejecting the terms as too little for the long-term bondholders. "It was an impressive effort, especially the way bondholders seemingly looked out for each other," says Sid Bakst, a bond manager at Robeco Weiss, Peck & Greer who wasn't involved in the EOP affair. "It's one of the first things we ask for nowadays," says Mr. Bakst of Robeco Weiss. "It's an insurance policy that protects against the worst-case scenario." If companies choose not to include covenants, they may have to commit to higher interest rates before investors will buy their bonds. Full Text (1002 words) (c) 2005 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. The flurry of debt-driven corporate mergers, spinoffs and buyouts is putting a normally staid group of investors -- investment-grade bondholders -- on the defensive. Typically a genteel bunch populated by life insurers and pension- fund managers, these risk-averse investors are learning the hard way that their bets on high-quality corporate bonds, some of the safest debt around, are more vulnerable than believed. Holders of highly rated bonds in companies like casino operator Harrah's Entertainment Inc. or energy firm Kinder Morgan Inc. have seen their investments dropped in value overnight after private-equity shops launched bids for the companies. The bids came with plans to load the companies up with new debt. The heavier debt burden meant existing bondholders became more exposed to default. They had added exposure, because the new debt would be paid off first if a default actually occurs. In both cases the credit rating on the existing bonds tumbled from investment grade to junk. "The whole culture of high-grade bondholders for a very long time was lackadaisical, where nobody was ever worried," says Robert Haines, a bond analyst in New York at CreditSights, an independent debt- research firm. That might be changing as buyout shops search out more big, high- quality companies to take over. In a rare show of solidarity, some debt investors are fighting back. Blackstone Group's purchase of Equity Office Properties Trust, the nation's largest office landlord, for $23 billion is one example. EOP's shareholders voted yesterday in favor of a buyout deal, concluding Blackstone's bidding war with Vornado Realty Trust. The deal came with significant gamesmanship between existing bondholders and the company. On Dec. 26, before Vornado appeared on the scene, EOP and Blackstone announced plans to buy back all of EOP's $8.4 billion in bonds as part of the Blackstone buyout. The offer covered short-term bonds due within the next 10 years and longer-term bonds due as late as 2031. But debt investors rallied against it, rejecting the terms as too little for the long-term bondholders. "It was an impressive effort, especially the way bondholders seemingly looked out for each other," says Sid Bakst, a bond manager at Robeco Weiss, Peck & Greer who wasn't involved in the EOP affair. In that case, bondholders had some leverage against the company. They were protected by provisions in the debt, known as covenants, that limited the amount of new debt EOP could take on in a buyout. Without the consent of existing bondholders, in other words, Blackstone might not have been able to finance the deal. AIG Global Investment Group, which held both long-term and short- term bonds, banded other investors against the offer. By Jan. 11, EOP and Blackstone agreed to boost the offer to long-term bondholders by about 20%, paying nearly $950 million for the $725 million in outstanding bonds. For the remaining $7.6 billion in debt, EOP and Blackstone agreed to pay about $8 billion. In total, bondholders will be paid about $9 billion for their $8.4 billion in bonds. Bondholders in Tyco International Ltd., which is undergoing a restructuring that will split the conglomerate into three separately traded pieces, are bracing for a potential replay of the EOP situation, says one Tyco bondholder. Like EOP bondholders, investors in Tyco bonds have covenants that allow them to get their money back in a merger. In many other cases, high-grade bondholders don't have these protections, making them especially vulnerable, even targets. Without covenants, they have little negotiating leverage with buyout shops. And because the bonds are high-grade and pay relatively low interest rates, they are appealing to buyout shops looking for companies that can bear more debt. Now more investors are demanding these provisions. Home Depot, Federated Department Stores, and Black & Decker were among the companies that included such provisions. "It's one of the first things we ask for nowadays," says Mr. Bakst of Robeco Weiss. "It's an insurance policy that protects against the worst-case scenario." If companies choose not to include covenants, they may have to commit to higher interest rates before investors will buy their bonds. Even with the provisions, some bond investors are finding themselves vulnerable. This week, some bondholders in junk-rated Lear Corp. found themselves on the losing end of a buyout offer by Carl Icahn even though their bonds contained change-of-control provisions. Lear had issued $900 million in bonds last November with terms that ensured the bonds would be paid off in full if ownership of the company changed -- but not if certain "permitted holders" took control of it. These holders were defined elsewhere in the bond agreement as Mr. Icahn, his affiliates and funds controlled by him. As a result, prices of the newly issued bonds slumped on news of the buyout bid. In Trade Deal, a Shift on Generics; Agreement Opens the Door To Cheaper Drugs Abroad, Easing Some Patent Rules Sarah Lueck. Wall Street Journal. (Eastern edition). New York, N.Y.: May 17, 2007. pg. A.4 Abstract (Document Summary) marks the first big setback for the pharmaceutical industry since Democrats claimed Capitol Hill. The administration "has permitted the weakening of intellectual- property protections in these agreements," For now, the provisions likely only affect pending trade said Billy Tauzin, president of the Pharmaceutical deals with Peru, Panama and Colombia. But the plan Research and Manufacturers of America, the drug also signals a broader shift as congressional leaders industry's main trade group, in an interview. "They were give greater weight in trade talks to providing cheaper desperate to get continuing trade authority" from medicines for the poor, even if it means denying the Democrats in Congress, he said. "The fact is, their Republican-friendly drug industry some of the protection leverage changed since November." it says it needs. "Compared to the many steps backward that have been The administration "has permitted the weakening of taken since 2003, this is a bit of relief for people who intellectual- property protections in these agreements," want access to affordable medicines," said Ellen said Billy Tauzin, president of the Pharmaceutical Shaffer, co-director of the Center for Policy Analysis on Research and Manufacturers of America, the drug Trade and Health in San Francisco. "Compared to an industry's main trade group, in an interview. "They were actual policy that would provide affordable medicines for desperate to get continuing trade authority" from people and fairly balance that with innovation, it is a Democrats in Congress, he said. "The fact is, their small step forward." leverage changed since November." Under recent trade agreements, the U.S. The main focus of the pressed countries to bipartisan trade deal, agree to "linkage," announced last week, which requires local involves requiring U.S. drug regulators to make trade partners to meet sure a generic product new standards for doesn't violate any giving their workers patents before allowing labor rights and it on the market. Public- ensuring health advocacy groups environmental have said this puts protections. But the makers of brand-name deal also allows drugs at an advantage developing countries and burdens regulators. more flexibility in Drug companies dealing with U.S. drug support linkage because it prevents copies of their makers than they would have had under earlier products from being sold during lengthy court battles. versions. Without it, companies will have to be more vigilant. To take industry concerns into account, the new policy calls Specifically, the policy would ease requirements on for countries to set up fast procedures for resolving developing- country regulators to prevent the sale of patent disputes. patent-infringing products. It also releases trading partners from a requirement to extend the time for Full Text (884 words) patent protections as a form of compensation for delays (c) 2007 Dow Jones & Company, Inc. Reproduced with in drug approvals. permission of copyright owner. Further reproduction or distribution is prohibited without permission. Public-health advocacy groups have argued for years that U.S. trade policy under Mr. Bush often protected WASHINGTON -- A new trade agreement between brand-name drug makers at the expense of poor Congress and the White House contains provisions that countries in need of more-affordable treatments.