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Related Issuers
Announcement:

Moody's lowers ADT's outlook to negative; affirms Baa2 sr unsec rating

Global Credit Research - 27 Nov 2012

New York, November 27, 2012 -- Moody's Investors Service lowered The ADT Corporation's ("ADT") ratings outlook to negative from stable after management's announcement today that it will use incremental debt to fund share repurchases and raise target leverage to 2 times debt / EBITDA. Concurrently, Moody's affirmed ADT's Baa2 senior unsecured rating and Prime-2 short-term rating.

Ratings affirmed:

Senior unsecured rating, Baa2

Short-term rating, Prime-2

RATINGS RATIONALE

"The negative ratings outlook reflects our concern that ADT's financial policies could continue to evolve to the detriment of debt holders", stated Moody's analyst Suzanne Wingo. ADT's willingness to accommodate activist shareholder demands with debt-funded share repurchases, shortly after the Tyco spin-off and the issuance of $2.5 billion of long term bonds in connection with that spin-off, was unexpected. Even so, the Board of Director's three-year / $2 billion share repurchase authorization represents a smaller return of equity and a more conservative capital structure than a shareholder-activist has demanded and we are concerned that ADT will face further pressure to boost near-term returns from current or other shareholders in the future. In addition, management could become distracted by activist-shareholders, particularly should they accelerate their campaign in a public forum, just at the time when management is setting standards for ADT as a new public company.

The Baa2 senior unsecured rating reflects the predictable, annuity-like revenue streams and cash generation provided by ADT's customer base of over 6 million subscribers. ADT is the clear leader in the fragmented alarm monitoring industry with about a 25% market share. However, competition from new entrants and evolving technology pose longer term risks.

The ratings could be lowered if cable and telecommunication competitors begin taking significant market share, having a negative impact on ADT's business, such that ADT's net attrition rate approaches 15%, debt / EBITDA is sustained above 2x, or debt / RMR exceeds 13x. Debt-financed acquisitions, additional changes in financial policies that favor shareholders to the detriment of creditors, or an acceleration of return of capital above the $1 billion targeted in FY13 could also lead to a downgrade. Conversely, the outlook could be stabilized within the next 18 months if management demonstrates a track record of limiting debt-funded share repurchases to a level that maintains debt/ EBITDA at or below 2 times. While not expected in the near-term, the ratings could be upgraded if ADT's revenue size were to grow significantly while maintaining particularly strong margins and a conservative capital structure, and competitive threats from new entrants ease.

The principal methodology used in rating ADT Corporation was the Global Business & Consumer Service Industry Methodology published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Suzanne Wingo
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers ADT's outlook to negative; affirms Baa2 sr unsec rating
No Related Data.

 

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