MOODY'S AFFIRMS TYCO'S DEBT RATINGS (SENIOR Baa3); ASSIGNS BANK DEBT RATING; CHANGES OUTLOOK TO POSITIVE
Approximately $22 Billion of Debt Securities Affected.
New York, January 20, 2005 -- Moody's Investors Service has affirmed the long-term and short-term
debt ratings of Tyco International Group S.A. (TIGSA),
the principle debt issuer for Tyco International Ltd. and its consolidated
subsidiaries (collectively "Tyco"), assigned a Baa3 rating to TIGSA's
new $1 billion bank revolving credit facility and changed the rating
outlook to positive from stable.
The rating actions reflect Tyco's continued operational performance improvement,
strong free cash flow generation, and meaningful progress in debt
reduction. Despite the "headline risk" of the prior
management scandals and litigation overhang, Moody's noted that
Tyco's businesses have remained relatively strong, stemming from
highly diversified operations (both by product and geography), leading
market positions and strong brand names. Concurrently, the
company is also benefiting from renewed organic growth and realization
of cost initiatives.
The positive outlook incorporates Moody's view that Tyco will continue
to pay down debt from strong free cash flow in the next 12-18 months
as further margin expansion is realized, augmented by net proceeds
from remaining asset sales. The rating agency added that additional
improvement in debtholder protection measures should occur despite Tyco's
increase in dividends, further voluntary pension contributions,
and possible "bolt-on" acquisition activity.
Moody's added that the positive outlook also anticipates that Tyco
will continue to prudently allocate its substantial free cash flow --
investing in its businesses, paying down debt, and providing
appropriate returns for shareholders while maintaining sufficient liquidity
for legacy litigation contingencies, the timing and scope of which
remain uncertain. The rating agency has used for modeling purposes
a conservative $3 billion for aggregate settlement/judgments to
calibrate Tyco's liquidity profile.
Continued operating improvements, strong cash flow generation and
further debt reduction would be viewed favorably. More specifically,
free cash flow-to-adjusted debt in the 20%-25%
range, return on assets approaching 10% and debt-to-EBITDA
strengthening to less than 2.0x, combined with the resolution
of ongoing investigations and legal matters within the $3 billion
threshold, could result in a favorable rating action prior to the
company's fiscal year end (September 30th). On the other hand,
a divergence from the current strategy of emphasizing organic growth and
debt reduction, a significant decline in operating performance and
cash flows, along with adverse litigation decisions against the
company in excess of the $3 billion threshold could have a stabilizing
impact on the rating/outlook.
Rating assigned with a positive outlook:
Tyco International Group S.A. - Baa3 senior unsecured
debt rating for the $1 billion five year bank revolving credit
facility, guaranteed by Tyco International Ltd.
Ratings affirmed with positive outlook:
Tyco International Group S.A. - Baa3 for senior notes
and debentures, shelf registration ratings of (P)Baa3 for senior
debt securities, (P)Ba1 for subordinated debt securities,
Baa3 senior unsecured debt rating for the $1.5 billion senior
unsecured bank revolving credit agreement due 12/22/06 and Prime-3
for the short-term debt rating. These debt obligations and
shelf registration are guaranteed by Tyco International Ltd.
Tyco International Ltd. - Shelf registration ratings of
(P)Ba1 for senior debt securities, (P)Ba2 for subordinated debt
securities and (P)Ba3 for preferred stock. Debt securities issued
at the Bermuda holding company would be structurally subordinate to debt
securities raised at the TIGSA level.
Tyco International (US) Inc. - Baa2 for senior unsecured
notes and debentures. Debt securities issued at this operating
subsidiary level precede the formation of TIGSA and are structurally superior
to debt securities issued at the TIGSA level.
ADT Operations, Inc. - Baa3 for Subordinated Liquid
Yield Option Notes, guaranteed by Tyco International Ltd.
on a subordinated basis. While the guarantee of the Bermuda holding
company provides no meaningful credit lift, these securities issued
at the operating subsidiary level precede the formation of TIGSA and benefit
from being obligations of an operating subsidiary.
Mallinckrodt Inc. - Baa3 rating for senior unsecured notes,
debentures and industrial revenue bonds, guaranteed by TIGSA.
Raychem Corporation - Baa3 rating on the senior unsecured notes,
guaranteed by TIGSA.
Tyco continues to generate strong free cash flow (defined as cash flow
from operations less capital expenditures, dividends, ADT
dealer spend and holdbacks/earn-outs) and improving overall operating
margins as a result of improved working capital management, cost
cutting measures, restructuring actions, the sale of underperforming
businesses and improving economic conditions. For the fiscal year
ended September 30, 2004, the company's operating profit
as a percentage of sales increased to 14.4% from 11.4%
at the end of fiscal 2003, and free cash flow improved to over $5.4
billion (before $575 million in voluntary contributions to its
pension plans) from approximately $3.4 billion from the
prior year. The company's free cash flow-to-adjusted
debt ratio (excluding the consolidated underfunded pension position) improved
to 19.5% from 10.3%, interest coverage
improved to 5.7x from 3.5x and return on average assets
improved to 8.8% from 6.2%.
The company has entered into a new five year $1 billion bank revolving
credit facility with a final maturity of December 16, 2009,
replacing a $1 billion 364-day revolver that includes a
one year term-out option. Covenants remain the same as the
previous facility with the Material Adverse Change representation made
only at closing.
Tyco's liquidity remains strong, reflecting the strong free cash
flow generation, $4.5 billion of unrestricted cash
on the balance sheet at fiscal year end, and $2.5
billion of unused bank credit facilities that have ample headroom with
respect to financial covenants. The company is also in the final
stages of selling under-performing businesses that should yield
net proceeds of approximately $150 million. Tyco also has
$550 million of debt capacity under its off-balance sheet
accounts receivable securitization programs. As a result,
Moody's stated that the company is expected to internally fund its obligations
(increasing capital spending and research & development needs,
higher dividends and debt maturities) over the next year and has the capacity
to fund potential legacy litigation settlements/judgments up to $3
billion in the aggregate.
Tyco International Ltd., headquartered in Hamilton,
Bermuda, is a diversified global manufacturing and service company
of industrial and commercial products serving the fire protection,
electronic security service, disposable medical products,
packaging materials, flow control, electrical and electronic
components, and underwater telecommunication markets.
Corporate Finance Group
Moody's Investors Service
George A. Meyers
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service