MOODY'S CONFIRMS Ba2 DEBT RATING OF TYCO INTERNATIONAL GROUP; ASSIGNS BANK RATING; UPGRADES TYCO INTERNATIONAL LTD'S DEBT RATING TO Ba2
Approximately $23.3 Billion of Debt and Bank Credit Facilities Affected.
New York, May 01, 2003 -- Moody's Investors Service has confirmed the Ba2 senior unsecured debt
rating of Tyco International Group S.A. (TIGSA), the
principle debt issuer for Tyco International Ltd. and its consolidated
subsidiaries (collectively "Tyco") after Tyco announced its
second quarter results that included approximately $1.3
billion (pre-tax) of further accounting charges. At the
same time, a Ba2 senior unsecured debt rating has been assigned
to TIGSA's $1.5 billion 364-day senior unsecured
bank revolving credit facility. Lastly, Tyco International
Ltd.'s Liquid Yield Option Notes (LYONs) have been upgraded
to Ba2 from Ba3 in recognition of a newly issued guarantee from TIGSA.
The rating outlook is stable.
While the need to take further charges is disappointing, the rating
confirmation reflects the steady financial performance by Tyco.
Revenues and earnings for the second quarter before the various accounting
charges were within guidance, albeit at the lower end of the range.
On the other hand, free cash flow was $1.1 billion
and well exceeded the guidance of $450 million to $750 million
that was confirmed in March. While the magnitude of charges is
higher than Moody's expectation, current management's resolve
to deal with legacy issues is constructive. Also, the charges
are predominately non-cash in nature and represent a fraction of
Tyco's $37 billion revenue generation capability and net
worth that is approximately $25 billion.
The rating outlook anticipates that intermediate term earnings and cash
flow will continue to provide improving debt protection. The rating
outlook incorporates reduced liquidity concerns as a result of the company
raising $4.5 billion in the capital markets and paying off
$3.855 billion of bank debt and $1.9 billion
of convertible debentures that were put to the company in February.
Strong cash flow generation during the quarter and cash on hand resulted
in additional debt pay down of $1.1 billion of LYONs that
are putable in November, 2003 leaving about $2.5 billion
outstanding. Lastly, the rating outlook reflects the reduced
uncertainty surrounding the credit, stemming from intensive internal
audits, change in controls and operational reviews of over 2,100
Tyco legal entities, covering approximately 85% of Tyco's
consolidated assets, which resulted in the announced charges,
primarily found in Fire & Security and Engineered Products.
Although the company feels that substantially all the legacy issues have
been uncovered, Moody's noted that further goodwill or asset
impairment is possible. While certain risks remain, including
the need to address an ongoing SEC investigation and shareholder litigation,
Moody's anticipates that resolution of these matters will not materially
adversely affect the credit.
The $1.5 billion 364-day bank revolving credit agreement
with TIGSA as borrower will be guaranteed by TIGSA's parent,
Tyco International Ltd. (TIL), and TIL's subsidiaries --
Sensormatic Electronics Corporation, Scott Technologies, Inc.
and Innerdyne Inc. In addition, letters of credit up to $1.2
billion can be issued. The letters of credit will be guaranteed
by TIGSA's parent and parent subsidiaries, and by TIGSA's
subsidiaries -- ADT Security Services, Inc., Tyco
Plastics LP, SimplexGrinnell LP, Tyco Electronics Corporation,
Mallinckrodt Inc., Tyco Healthcare Retail Group, Inc.,
Tyco Healthcare Group LP, as well as two intercompany finance subsidiaries.
Although the upstream subsidiary guarantees could provide the bank creditors
structural superiority to other unsecured senior debtholders at the TIGSA
level, Moody's notes the existence of sunset provisions allowing
for the termination of subsidiary guarantees. Consequently no rating
uplift has been applied to the bank facility.
Major financial convenants in the new facility only include: EBIT
to Interest of not less than 2.5X, Debt to EBITDA of 4.35
to 1 at March 31, 2003, reducing quarterly to 3.5 to
1 at December 31, 2003, and minimum net worth of $25.7
billion at March 31, 2003, rising quarterly to $27
billion at December 31, 2003. Other financial covenants include
limitations on debt, liens, mergers and sales of assets,
sale and leaseback transactions and restricted payments. For each
and every borrowing under the facility, the company must represent
and warrant that since September 30, 2002 no Material Adverse Change
in business or financial matters has occurred. Tyco has indicated
that it is in compliance at the end of its second quarter ended March
Moody's noted that Tyco continues to face a number of challenges including:
(1) the outcome of external reviews consisting of legal investigations
and SEC inquiries, (2) other potential litigation matters,
(3) potential goodwill or asset impairment charges, and (4) the
company's ability to improve profitability and to generate sustainable
free cash flow in a difficult operating environment.
However, the rating agency expects that Tyco will generate approximately
$450 million of free cash flow (Tyco's new definition) during the
current quarter which, along with the company's total cash position
of over $4 billion, provides strong near-term liquidity.
Upcoming maturities include: $750 million in June,
$488 million in July, $534 million in August,
$73 million in October, and $2.5 billion putable
in November. Moody's noted that cash on hand, expected free
cash flow over the next three quarters of at least $1 billion (Tyco's
new definition), and unused availability under the 364-day
bank facility should be sufficient to meet the roughly $4.3
billion of debt maturities and put requirements through December 31,
2003. Cash balances at calendar year-end are expected to
approximate $750-$900 million, but could be
augmented from net proceeds from asset sales.
In conjunction with the bank facility transaction, the company has
announced that it has recently executed a TIGSA guarantee of Tyco International
Ltd.'s $2.5 billion LYONs, putable in
November, 2003 that are currently rated Ba3. As a result
of the guarantee, Moody's has raised the holding company's
debt rating to Ba2 reflecting the elimination of structural subordination.
Tyco International Group S.A. -- Ba2 senior
unsecured debt rating for $1.5 billion 364-day bank
revolving credit with a final maturity of January 30, 2004
Tyco International Ltd.-- $2.5 billion
senior unsecured Liquid Yield Option Notes to Ba2 from Ba3, guaranteed
by Tyco International Group S.A.
Tyco International Ltd. -- Shelf registration ratings
of (P)Ba3 for senior debt securities, (P)B1 for subordinated debt
securities, and (P)B2 for preferred stock.
Tyco International Group S.A. -- Ba2 for senior
notes and debentures; Shelf registration ratings of (P)Ba2 for senior
debt securities and (P)Ba3 for subordinated debt securities; Ba2
rating for the $2.0 billion senior, unsecured bank
revolving credit agreement due 2/7/06; and Not Prime short-term
debt rating. These debt obligations and shelf registration are
guaranteed by Tyco International Ltd.
Tyco International (US) Inc. - Ba1 for senior unsecured
notes and debentures.
ADT Operations, Inc.- Ba2 for senior subordinated
notes; and Ba2 for subordinated Liquid Yield Option Notes.
Both are guaranteed by Tyco International Ltd. on a subordinated
Raychem Corporation - Ba3 for the $388 million senior,
Mallinckrodt Inc. - Ba3 for senior unsecured notes and debentures,
and industrial revenue bonds.
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
George A. Meyers
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service