Marilyn Cohen, president of Envision Capital Management, discusses TOMA, and the relationship between these companies and their bond holders.

NANCY:  Hello, my guest today is Marilyn Cohen and we’re talking about TOMA.  Marilyn, I saw your YouTube video which was actually wonderful; take-overs, mergers and acquisitions TOMA.  You were talking to bondholders about what happens to them when their company gets taken over.  We’ve had a spade of mergers of acquisitions just recently again and no one talks about the bondholders.

MARILYN:  That’s because nobody cares about us bondholders, Nancy.

NANCY:  I care.

MARILYN:  Well, it depends upon who is taking over the company.  The worst of all possible worlds is when a private equity firm decides that they’re going to take over a company in which you own their corporate bonds.  Private equity puts in just a little teeny bit of equity and then they go out, issue junk bonds of which that bloats up the balance sheet, increased the leverage and if you’re an original bondholder you go wait, my credit quality is going to deteriorate, my credit metrics are going to go to _____ in a hand basket meaning that the amount of coverage that I’m going to have is going to deteriorate and it’s all bad for bondholders.  It really is when private equity comes in.

NANCY:  What’s going to happen with the example of doubt?  Whatever ends up happening with that?  I forgot, ICON I guess is trying to get involved in it now.  What will happen to the bondholders with Dell do you think?

MARILYN:  It’s already happened.  As soon as the announcement was made that Mr. Dell wanted to take over the company, the bonds totally tanked because they didn’t have any protection, any what we call change of control protection in their bond covenants so those bonds went down enormously.  That happens almost all of the time.  If another company takes over your company, usually it’s not as bad because if you have a good quality company or a company of equals, it usually doesn’t mean that they’re going to have to ante up and go out into the junk bond market and have a huge overlay on the bondholders.

NANCY:  Right.

MARILYN:  It’s pretty deleterious to your net wealth, there’s no question about that.

NANCY:  How does the bondholder find out?  What do they look for if they’re thinking about Carl Icahn is interested in Dell, Carl Icahn is interested in Apple; where do they go to find out if they have this change?

MARILYN:  Good question, okay in the prospectus there is a section called covenants.  There is a section under that called change of control.  You can have a company, Clorox is a perfect example in which they have five different bonds let’s say and some of them will have change of control protection and some of them won’t.  I had that exact example happen.  Carl Icahn said he was going to take over.  Clorox are the ones that have change of control protection barely budged.  Those that didn’t went down several points.

NANCY:  Wow.

MARILYN:  You have to roll up your sleeves.

NANCY:  Dig in.

MARILYN:  Dig in and look at what kind of protection you do or don’t have.  Now, will that protect you if you bought a bond at 115 and somebody takes it over at 101?  The answer is no, you’re going to lose that 14 points.  I think the rule of thumb is if you have a company bond, a corporate bond, in which somebody looks like they’re going to take you over and you have a big fat juicy premium profit in it, take the profit and get out.  Pay the tax.  Don’t let taxes be the determining fact for whether or not you’re going to hold them or fold them.

NANCY:  Well, super, good advice.  Thanks, Marilyn.

MARILYN:  Thank you.

NANCY:  Thanks for joining us at the video network.