Hortons' Poison Put Covenant

When Burger King announced its acquisition of Tom Hortons Inc. this week, Hortons' bondholders felt the effect as bond prices fell from 106 to 101 because of the lowered credit rating for the combined company. However, when the expected downgrade is announced, analysts believe the bond value will drop to 90 percent of par. Most of the bonds will likely be redeemed by Hortons as the bonds have a put provision that allows the bondholders to force Hortons to buy back the bonds at 101 percent of face value in the event of a takeover. While the put does protect bondholders from absorbing the full loss in value, bondholders will still experience the 5 percent drop in bond value. In Europe, Spens clauses force the company to buy back bonds closer to the market value of the bond prior to the acquisition.