Icahn Bondholders Charge Premium After Gains: Corporate Finance

Even as bondholders of Carl Icahn’s investing company enjoy market-beating gains, they’re demanding extra yield on new notes to compensate for risk in the maverick investing style of the world’s 35th-richest person.

Icahn Enterprises LP notes have returned 32 percent since Aug. 26, 2010, compared with 22 percent for bonds whose ratings are split between the lowest investment and highest junk grades. The New York-based company sold $500 million of 6 percent bonds last month that yielded 399 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg, compared with a spread of 274 for debt in the Bank of America Merrill Lynch Crossover Corporate index.

Icahn, 77, who became an activist investor after gaining fame as a corporate raider in the 1980s, has taken stakes and agitated for stockholder-friendly changes at companies from Dell Inc. to Transocean Ltd. That’s often at the expense of lenders, with yield spreads on bonds sold by those two companies widening more than a percentage point after Icahn entered the fray.

Unlike a typical “corporate borrower, you never know what he is going to do,” said Marc Gross, a money manager who oversees $3.5 billion in fixed-income funds at RS Investments in New York. “I don’t like these one man show kind of companies, too erratic, too dependent on one person. In the bond world, I would rather buy something more boring and safer.”

New Notes

Icahn Enterprises is rated Ba3 at Moody’s Investors Service and BBB- at Standard & Poor’s. The firm’s debt yielded an average of 6.45 percent on Aug. 26, compared with 4.8 percent for the average issuer in the crossover index.

The seven-year debt sale, announced July 29, was increased from $350 million, according to a person with knowledge of the offering who asked not to be identified because the marketing was private. The bonds were sold at face value and were quoted at 99.563 to yield 6.08 percent at 11 a.m., Bloomberg prices show.

Icahn Enterprises has been profitable in 16 of the last 18 years, posting losses during the financial crisis in 2008 and also in 2005, Bloomberg data show. Revenue has jumped more than 30 percent in each of the past two years to $15.7 billion in 2012.

Buying Protection

In at least one instance, Icahn seems to have been aware of the effect his stock purchases have on a target company’s bonds. Temple-Inland Inc. disclosed that Icahn and his funds were seeking government approval to buy as much as $500 million of its shares on Feb. 4, 2005.

On Aug. 5, 2005, the day the investor reported that he’d bought 3.54 million shares of the box maker in the second quarter, Icahn started buying credit-default swaps, according to a Feb. 16, 2007, filing with the U.S. Securities and Exchange Commission. The contracts, which typically rise as investor perception of Temple-Inland’s creditworthiness deteriorates, were quoted at a mid-price of 71.5 basis points that day, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market.

Icahn sold his swaps on Dec. 1 and Feb. 15, according to the filing. The contracts were at 101.5 and 80 basis points on those days, CMA prices show.

The average yield on Dell’s debt increased 1.2 percentage points to 5.1 percent through Aug. 26 from March 22, before Icahn’s stake was reported, Bank of America Merrill Lynch data show. The company’s yields had already climbed before his involvement, from 2.595 percent on Jan. 11, the trading day before Bloomberg News revealed the company was said to be in talks to go private.

Philosophy Student

Icahn is trying to thwart a buyout proposal from Dell founder Michael Dell and Silver Lake Management LLC, favoring a recapitalization plan that would keep the stock in public hands.

Transocean’s yields widened 1.1 percentage points to 4.27 percent since Jan. 11, before Icahn’s stake was disclosed.

After Icahn took a stake of more than 5 percent in Transocean, the chairman stepped down and shareholders voted for one of Icahn’s three board nominees in May, while rejecting his a $4-a-share dividend plan in favor of a lower payout supported by the company.

Icahn was born in Queens, New York, the son of a synagogue cantor and a high school teacher. He attended public school then enrolled at Princeton University to study philosophy. After stints in medical school and the army, he became a stock broker in 1961 and formed his own firm by the end of the decade.

‘The Aura’

In 1978, Icahn began taking individual positions in companies, making a mark in 1984 with a stake in Texaco Inc. during its failed merger with Pennzoil, later doubling his money on the investment. He became known as a raider after proxy fights with Trans World Airlines, Gulf & Western, Nabisco and Uniroyal.

Icahn has invested about $1 billion in Apple Inc. and is trying to convince Chief Executive Officer Tim Cook to return more cash to shareholders than already planned.

Shares of Icahn Enterprises have gained 127 percent since Aug. 26, 2010, mostly reflecting a 65 percent advance this year, Bloomberg data show. The S&P 500 index is up 14 percent in 2013.

Investors have accepted lower yields on debt from other takeover-oriented companies. Blackstone Group LP paid 325 basis points more than similar-maturity Treasuries for its $400 million bond issue last August, which S&P rated A, Bloomberg data show. KKR & Co. paid a spread of 245 basis points for A-rated 30-year bonds in January.

The spreads indicate investors feel safer with those companies, which are better rated, have more balanced business models, and less “key man” risk, according to Noel Hebert, chief investment officer at Concannon Wealth Management, which oversees about $250 million from Bethlehem, Pennsylvania.

Icahn Enterprises “is much more tied up in the aura of its founder,” he said.