UTX United Technologies Corporation

By Christopher Whittall 

Last month, investor Tom Ross bought bonds from Honeywell International Inc., one of a growing number of U.S. companies issuing debt in Europe.

Days later, Mr. Ross was at his desk when a headline made him do a double-take. Honeywell was proposing to buy rival United Technologies Corp, in an acquisition that the company said would add around $36 billion of new debt to its balance sheet.

"Surely that can't be right," Mr. Ross, a fund manager at Henderson Global Investors, remembers telling colleagues.

But it was, and within 24 hours he had sold his bonds amid widespread investor anger that Honeywell had not disclosed an event that would impact the value of this recently issued debt.

Honeywell abandoned the takeover in early March, but the repercussions continue.

Fund managers here now ask whether European investors will become more cautious over the increasing number of U.S. companies taking advantage of the region's ultralow borrowing rates. Or will investors soon get over their Honeywell gripe and continue buying? The answer will say a lot about what investors are willing to put up with as they search for returns amid rock-bottom interest rates.

Either way, investors say the issue has highlighted a legal gray area over how much information companies are obliged to disclose before selling debt securities.

"It was disappointing" said Mr. Ross. "Until that news was public, they should have held off printing the (bond) deal."

Mr. Ross said Honeywell had given no indication that they were looking at a significant acquisition when he spoke to company officials at their roadshow ahead of the issue. Investors said they couldn't think of a precedent in European bond markets.

Honeywell declined to comment for this article.

Corporate bond markets are used mainly by professional investors and so not generally subject to the same regulatory requirements as those securities that are also sold to retail investors, such as initial public offerings. But companies selling debt typically publish lengthy prospectuses to provide investors with material information that could affect the value of their securities. These prospectuses are legal documents.

"Typically it's things you don't say that hurt investors, rather than things you do say." said Apostolos Gkoutzinis, head of the European capital markets group at Shearman Sterling LLP.

Mr. Gkoutzinis said whether to disclose a potential merger can be a difficult judgment call and depends on the probability of completion, but he advises clients to err on the side of caution.

Honeywell, which makes everything from aviation equipment to thermometers, said in filings with the Securities and Exchange Commission it was raising EUR4 billion in bonds for general corporate purposes.

This debut euro debt sale proved popular. Banks handling the sale on Feb. 16-- Bank of America Corp., Barclays PLC, Citigroup Inc. and Goldman Sachs Group Inc--received EUR11.25 billion ($12.4 billion) of orders, according to a person familiar with the deal.

On the day that the deal settled, Feb. 22, reports surfaced that Honeywell had been in merger talks with United Technologies since last year. This was later confirmed by the companies.

The news caused the bonds to sell off, widening the differential between yields on one part of the deal and safe government debt by around 0.35 percentage point, according to one investor. Standard & Poor's Ratings Services said the addition of $36 billion in debt to Honeywell's balance sheet could cause its assessment of the company's financial risk profile to deteriorate.

Mr. Ross said he called to berate bankers for a perceived lack of due diligence. He said he was told that they were equally surprised by the news.

Honeywell told investors that the company had taken legal advice on the issue of disclosure and been told it had done nothing wrong, said one investor.

On March 1, Honeywell called off its pursuit of United Technologies, saying the company was unwilling to engage in negotiations.

Honeywell's euro-denominated bonds bounced back. But investors haven't.

"This is not how I would like to be treated as a bondholder. We have to rely on what companies are telling us," said Wolfgang Kuhn, a portfolio manager at Aberdeen Asset Management, who didn't buy the Honeywell bonds.

The European Central Bank's vast stimulus program has lowered borrowing costs in euros, tempting U.S. companies who are also eager to widen their investor bases.

U.S. companies from Coca-Cola Co. to Apple Inc. borrowed in euros last year, selling a record EUR66 billion in euro-denominated debt, according to data provider Dealogic. So far this year, U.S. companies have accounted for over a third of total bond issuance in euros.

But some European investors say they will now be more cautious on new U.S. deals.

But other investors believe that Europe's rock-bottom interest rates will continue to attract U.S. companies, while yield-starved local investors will continue to buy them.

Honeywell, for one, hasn't given up on Europe.

At a March 2 investor conference, chief financial officer Tom Szlosek said the February sale had helped connect Honeywell with new lenders.

"It's a market that we think we can potentially go to again in the future," he said.

--Ted Mann contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

March 08, 2016 11:38 ET (16:38 GMT)

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