Another day, another blistering loss for Tyco ( TYC) shareholders. Shares of the Bermuda-based conglomerate fell another 23% Tuesday -- they're now down around 60% this year -- while yields on its bonds rose to levels normally associated with junk bonds. Contributing to Tuesday's slide was word that Fitch put the debt of Tyco's financial services subsidiary, Tyco Capital, on review. (It subsequently downgraded the unit after the close of trading.) Fitch and Standard & Poor's have recently cut their ratings on Tyco debt while maintaining an investment grade. And despite Tyco's efforts to extinguish the fire that's now hungrily consuming its shares -- Tyco Capital said after the close that it would draw down an $8.5 billion bank credit line to buy back its short-term debt, known as commercial paper -- there's no way of knowing when Enron-traumatized investors might draw the line on the selling. In fact, it sometimes appears as if the company's efforts to reassure investors -- such as the CP buyback -- have the exact opposite effect. "It's more of a question of investor confidence," says Bob Basel, director of listed trading at Salomon Smith Barney. "People just don't have the confidence that it's a company they want to be with."
The evidence supporting Bannister's belief that Tyco is being unfairly punished remains unseen, but his notion that the company is suffering from a confidence contagion isn't far from the mark. On the face of it, the Tyco news on Tuesday was only incrementally worse than it was a day before. Yet the shares tumbled hard. The interplay between Tyco's stock and bonds make this confidence crisis particularly damaging. Trading in Tyco debt reflects the bond market's view of the company's creditworthiness. When the bonds fall, stock investors question Tyco's access to the credit market. And so the stock falls.