MOODY'S COMMENTS ON TYCO INTERNATIONAL (SENIOR AT Ba2)
New York, September 18, 2002 -- Moody's Investors Service said that the information disclosed in yesterday's 8K filing by Tyco International Ltd. (Tyco) does not change the company’s current rating status, and the ratings for Tyco and its subsidiaries remain under review for possible downgrade. The rating agency noted that the filing contained detailed information about the depth and breadth of malfeasance by former executive officers and board members of the company that have been revealed as the result of the first phase of an investigation that is ongoing. The filing also detailed the actions that have been taken by the company to strengthen its management structure and corporate governance. The rating agency noted that these actions provide a basis for improved governance practices in the future and for re-establishing the company’s credibility in the financial markets.
Nevertheless, the rating agency noted that the ratings remain under review pending the outcome of several factors: (1) any emerging issues related to the second phase of the company's ongoing internal investigation, (2) outcome of external reviews consisting of legal investigations and SEC inquiries, (3) other potential litigation matters, (4) any changes in the company's strategic direction that could include potential goodwill or asset impairment charges and financial policies under the new management team, (5) the company’s ability to implement a comprehensive refinancing plan including its ability to repay/refinance maturing debt over the next 12-18 months, (including two convertible debt issues that have "put" features that could require significant cash calls in calendar 2003 and Tyco's $3.855 billion term loan that matures in February 2003), and (6) the company's ability to restore profitability to historical levels, especially within the Electronics segment, as well its ability to generate meaningful free cash flow in an operating environment where Tyco expects more modest 10-15% organic growth.
Moody’s noted that the misappropriation of corporate funds and resources by former executive officers and board members of Tyco that were uncovered in the first phase of the Boies internal investigation was extensive. The company has taken significant actions to improve its internal governance practices and has also initiated steps to seek restitution of corporate funds from prior management and directors. However, findings stemming from the second phase of the investigation, intended to scrutinize the divisional level and address, among other things, ongoing accounting concerns, will be crucial to restoring investor, customer, and supplier confidence. Moody’s continuing review will examine the findings of the second phase study including the presence and significance of any new accounting disclosures. The rating agency commented that confirmation of the current ratings, and ultimately Tyco’s success in normalizing banking relationships and accessing the capital markets, will be dependent on the absence of further negative news surfacing from ongoing investigations including the second phase of the internal study, expected to be completed later this Fall.
With regard to corporate governance issues, Moody’s said that Tyco’s Board decision not to stand for re-election provides an opportunity for the company to re-establish its governance standards without the lingering questions associated with prior management and directors. The nomination of the proposed slate of new board members, along with the new chief financial officer and chief counsel appointments, represent positive steps taken by Tyco’s new CEO. Also viewed very constructively is the expanded second phase of the internal investigation that should provide greater clarity as to the quality of Tyco’s financial reporting.
The rating agency expects that Tyco’s free cash flow generation for this quarter will be within the range of $800 million to $1 billion and the company’s liquidity, enhanced by $4.4 billion of proceeds from the CIT IPO, remains strong in the near-term. Scheduled maturities of $1 billion of debt have been paid off this quarter. However, Moody’s noted that Tyco still faces liquidity and refinancing risks associated with its significant debt burden with sizable maturities over the next 12 -16 months.
Tyco International Ltd., headquartered in Hamilton, Bermuda, is a diversified global manufacturing and service company serving the fire protection, electronic security service, disposable medical products, packaging materials, flow control, electrical and electronic components, and underwater telecommunication markets
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