NEW YORK (Bloomberg) — Tyco International Ltd. bondholders, who lost more than $1.2 billion five years ago when a debt-fuelled buying binge led to accounting errors, are making sure they won’t get fooled again.Enter Andrew Rosenberg, the lawyer who got Blackstone Group LP to pay investors almost $225 million more than face value for the bonds of Equity Office Properties Trust when the real estate company was bought this year in the biggest leveraged buyout.

Debt investors hired Rosenberg to fight for the $750 million they say they’re entitled to as part of Bermuda-based Tyco’s plan to split into three companies.

The owner of ADT security systems and maker of health-care and electronics products two months ago said it may spend $1.6 billion on the plan. Bondholders say that means the company may try to buy back their debt at a discount.

“The best way to avoid a war is to be prepared for one,” Rosenberg, 43, said in an interview from his office at Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York. Tyco should get the consent of a majority of bondholders before proceeding with a break-up that will strip “substantially all” of the assets backing their holdings, he said.

Bond investors are fed up with companies rewarding shareholders at their expense. Members of the Standard & Poor’s 500 used cash on hand to repurchase a record $431.8 billion in stock in 2006 instead of paying down debt, and more than $700 billion in credit-damaging leveraged buyouts were announced last year, according to data compiled by Bloomberg and S&P.

“The suspicion is that Tyco will try to lowball the offer and challenge bondholders,” said Glenn Reynolds, head of independent research firm CreditSights Inc. in New York.

The Tyco investor group is made up of “major” insurance companies and money managers, Rosenberg said. Tyco’s biggest bondholders include New York-based American International Group Inc., Prudential Financial Inc. in Newark, New Jersey, Western Asset Management Co. of Pasadena, California, and Hartford Investment Management Co. in Hartford.

A majority of the bondholders for about $6 billion of debt affected by the Tyco breakup are “either formally signed up” or “ready to join”, Rosenberg said. The group has contacted Tyco, which declined to provide additional information about its plans, more than a year after announcing the split, he said.

“You can’t blame them for trying to see what they can get done at the cheapest price,” Chuck Moon, managing director and head of investment-grade credit at Hartford, said of the companies and private equity firms. “It’s kind of expected. On our side, we’ll have to defend our rights,” he said in an interview.

Moon, who oversees $30 billion, declined to comment specifically about Tyco. Steve Kellner, head of credit portfolios at Prudential, and Kenneth Leech, chief investment officer at Western Asset, didn’t return calls for comment. Hartford, AIG and Prudential also owned Equity Office bonds.

Rosenberg “has handled some tough cases that weren’t obvious winners”, said Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., which manages $26 billion in fixed-income.

A Tyco spokesman, Paul Fitzhenry, said the company isn’t ready to answer questions about how it will handle its debt. Though Tyco is based in Pembroke, Bermuda, it is run from West Windsor, New Jersey.

“Tyco’s bondholders are an important constituency to the company, and we will talk to our bondholders as soon as we can,” Fitzhenry said in a written statement.

Because the plan is in the review process with the Securities and Exchange Commission, “we are not in a position to discuss any plans for Tyco’s existing debt,” he said.

Tyco chief executive officer Edward Breen, 51, decided to split the company in three after job cuts and factory closings didn’t generate enough growth to satisfy the board.

Tyco is spinning off its health-care and electronics divisions and Breen will run the remaining company, Tyco International, which includes the security and fire-prevention systems businesses.

As part of the plan, Tyco will do a reverse stock split to fold four shares into one. The company’s stock price rose 5.34 percent last year, compared with a 13.6 percent gain for the S&P 500, after falling 19.3 percent in 2005.

Investors in the US corporate bond market, where about $5 trillion of debt is outstanding, are fighting to preserve the value of their investments as companies sacrifice credit quality to deliver cash to shareholders. Corporate bond investors lost more than $2 billion last year from LBOs alone, according to data compiled by Merrill Lynch & Co. and Bloomberg.

“It’s becoming increasingly well understood among issuers” that they can anticipate a fight with bondholders, said J. Andrew Rahl, an attorney at Anderson Kill & Olick PC in New York.

Rahl represented bondholders who pushed truck maker Navistar International Corp. to accelerate payments on its debt after the company failed to report financial results since September 2005.

Former Tyco CEO L. Dennis Kozlowski spent $64 billion over eight years ending in 2002 assembling businesses ranging from alarm-service company ADT to Kendall International Co., which makes bandages and wound dressings. The buying spree pushed long- term debt to more than $19.6 billion.

Tyco became a symbol of corporate excess after a $2 million party that Kozlowski, 60, threw for his wife in Sardinia in June 2001, paid in part by the company.

Then last April, Tyco agreed to pay $50 million to settle allegations by the SEC that the company inflated its results by more than $1 billion under Kozlowski’s leadership. Kozlowski and Chief Financial Officer Mark Swartz were convicted of larceny and fraud in June 2005. They are serving 8 [1/3] to 25 years in prison.

Bondholders lost money on Tyco when the company’s debt fell to as little as 71 cents on the dollar and its credit rating was slashed to high-yield, high-risk, or junk, status by Moody’s Investors Service in 2002. Moody’s restored Tyco’s investment- grade bond ratings in 2004. Bonds rated below Baa3 by Moody’s and below BBB- by S&P are considered junk.

“Tyco is famous for all the wrong reasons,” Reynolds at CreditSights said. “It was an ethical mink farm, as close to a den of thieves you could find in the new millennium.”

The break-up plan is the second for Tyco since 2002, when it announced a split into four different companies.

The company abandoned the effort after investors disagreed with the assertion that the value of the units would be worth 50 percent more than the whole. Shareholders lost $41 billion after the 2002 plan was announced and as Tyco cut profit forecasts.

At the time, Tyco said it would buy back most of its bonds and planned to raise money from stock offerings and asset sales to reduce debt by $11 billion, according to Gimme Credit Publications Inc., a Chicago-based debt-research firm.

This time, Tyco said it plans to spend money to complete the breakup and didn’t say what it will do with the debt.

“Tyco’s disgraced former management was more sensitive to creditor concerns when it announced the previous plans to split the company into four companies,” Carol Levenson, an analyst at Gimme Credit, said in a report when Tyco unveiled its new plan last year. She didn’t return a phone call seeking comment.

Bondholders fear a repeat of the Equity Office situation, where that company and Blackstone devised a tender offer that lumped holders of all the debt securities into one group.

That reduced the ability of investors to reject the terms if they were offered a worse price than owners of other bonds. In most tenders, investors in each series of debt vote on the offer for their individual bonds.

With the help of Rosenberg, a majority of Equity Office’s bondholders stood up for the minority, rejecting two offers to ensure that all investors were treated equally.

“You’ve seen instances, like the EOP situation, where the first bid was definitely not reflecting what our rights were and you saw the debtholders standing pretty firm and it ended up working out the way it’s supposed to work out,” said Hartford’s Moon.

Tyco has about $10 billion in bonds, with about 70 percent due in the next six years. Its debt maturing in 2029 trades at about 117.5 cents on the dollar, 6.5 cents short of the so-called “make-whole” amount called for in the lending contracts if the bonds are tendered.

Bondholders would receive about $750 million above face value for their securities if the contracts are followed, according to data compiled by Bloomberg. Most of that premium, or about $454 million, will go to holders of $1.8 billion in notes maturing from 2028 to 2031.

The Tyco situation is being watched for signs that “bondholders won’t turn on each other like a pack of rats,” deterring other companies, said Reynolds of CreditSights.

“The bankers may say, `Look at what happened to Tyco. So play it straight. Play it fair. Build it into your model that you’re going to need to have to absorb it.”’

Rosenberg is gathering phone numbers and e-mail addresses of bondholders, waiting for the day when Tyco releases details of its breakup.

“Bondholders are organised much more quickly and efficiently than they ever were,” Rosenberg said. “At the least they know you’re going to have a fight every time. I’m not sure the company wants a sideshow with the bondholder community given the size of this transaction.”

Tyco’s 6.375 percent notes due in 2011 will pay 106.2 cents on the dollar if the bonds are bought at a yield of 35 basis points above a Treasury yield of 4.477 percent, the amount called for in the bond indentures. At $1.5 billion in face value, the premium would be $90 million, or $60 per $1,000 bond.

For later maturities, the premium gets more expensive. For Tyco’s 6.875 percent note due in 2029, a spread of 25 basis points over Treasuries soars to $240 per $1,000 bond. For an $800 million issue, that’s $190 million.