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Rating Action:

MOODY'S DOWNGRADES TYCO'S DEBT RATINGS (LONG-TERM TO Baa3, SHORT-TERM TO PRIME-3); RATINGS REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE; AFFIRMS CIT DEBT RATINGS (LONG-TERM AT A2; SHORT-TERM AT PRIME-1)

07 Jun 2002
MOODY'S DOWNGRADES TYCO'S DEBT RATINGS (LONG-TERM TO Baa3, SHORT-TERM TO PRIME-3); RATINGS REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE; AFFIRMS CIT DEBT RATINGS (LONG-TERM AT A2; SHORT-TERM AT PRIME-1)

Approximately $59 Billion of Debt Securities Affected ($25 billion for Tyco, $34 billion for CIT).

New York, June 07, 2002 -- Moody's Investors Service downgraded both the long- and short-term debt ratings of Tyco International Ltd. (Tyco) to Baa3 and Prime-3 from Baa2 and Prime-2, respectively. Tyco's ratings remain under review for possible further downgrade. The rating actions for Tyco anticipate the completion of the planned sale of its CIT Group subsidiary, but consider the potential for proceeds from that sale to fall short of prior expectations. As a result, debt reduction will not be in line with prior expectations and the company will likely require a greater provision against its carrying value of CIT. Moreover, the rating actions reflect Moody's growing concern about the potential implications for Tyco of recent developments, including required management changes and emerging corporate governance issues, as well as the possibility of additional adverse developments as an internal review of the past use of company funds by the former CEO progresses. These issues could divert management focus from the core business and hinder the company's ability to restore confidence of its customers, suppliers and investors.

Moody's affirmed its A2 and Prime-1 ratings on CIT Group Inc.'s debt. The affirmation reflects Moody's belief that the underlying CIT franchise remains sound despite its need to tap alternate sources of liquidity and control its growth, as well as despite the management and employee distraction from the issues faced by its parent company. Additionally, a critical factor in Moody's affirmation is its expectation that CIT will be completely separated from Tyco in the very near future, as early as the end of June. Moody's said that if CIT's separation is delayed beyond this timeframe, it is likely that CIT's long and short-term ratings would be adjusted downward. This would reflect increased concern about Tyco's commitment to the separation, and Moody's belief that this could have lasting negative effects on CIT's franchise.

Moody's said that completion of the CIT sale would provide Tyco with significant proceeds to begin needed debt reduction. However, Moody's believes that potential proceeds from the sale will fall short of prior expectations and Tyco will continue to face a significant debt burden with sizable maturities over the next 18 months. The rating agency noted that Tyco anticipates cash liquidity of about $3.0 billion as of June 30 (after fully drawing its available bank lines earlier this year) which should enable it to meet funding needs during the current year. The company has also recently reaffirmed its guidance for near term earnings and cash flow generation. Tyco's portfolio of businesses is fundamentally strong, nevertheless, the rating agency said that any softness in economic trends, or more aggressive competitive pressures in Tyco's business segments (such as that already seen in the healthcare and fire & security lines) could reduce free cash flow generation. Moreover, until a new CEO is named and the management structure stabilizes, the company will be challenged to maintain its focus on operations and cash flow generation. Consequently, Moody's believes that greater uncertainty exists regarding Tyco's ability to achieve planned debt reduction from internally generated funds. In such a scenario, Moody's notes that the need for refinancing could come much sooner than planned, giving Tyco's new management less time to restore confidence in the marketplace by demonstrating that its evolving strategy emphasizing organic growth will work, and that corporate governance issues will be resolved.

For these reasons, Moody's has concluded that the near term rating profile of Tyco is not consistent with the prior Baa2 rating. Confirmation of the ratings at the current Baa3 level would require among other considerations: substantial near term debt reduction from successful completion of the CIT sale, continued strong consolidated results with free cash flow applied to further debt reduction, resolution of intermediate term debt maturities and negotiation of new bank credit facilities, resolution of management transition that results in a stable management team with a focus on rebuilding fundamental business strength, and satisfactory resolution of all corporate governance issues.

Absent significant near term debt reduction with proceeds from a successful sale of CIT, Tyco's ratings would likely fall into speculative grade. Moody's noted that the company has certain rating triggers that, in the event of a downgrade below investment grade, could require it to repurchase its Yen30 billion ($223 million) 3.5% notes due 2030 at the Tyco International Group SA level. Rating triggers associated with receivables previously sold under third party sale of accounts receivable programs at the Tyco International Ltd level could be impacted by this rating action. Amounts outstanding under these receivables programs aggregated $530 million as of March 31, 2002. In addition to the CIT transaction, Moody's ongoing review will consider any emerging issues related to the company's internal investigation as well as its progress in identifying new management leadership. The review will incorporate any changes in the company's strategic direction and financial policies under the new management team and any actions implemented to enhance corporate governance practices. Moody's will also will also focus on Tyco's liquidity and debt paydown plan going forward, paying particularly close attention to the company's ability to repay/refinance maturing debt over the next 12-18 months, as well as its ability to handle two convertible debt issues that have "put" features that could require significant cash calls in calendar 2003. The rating agency said that the company's ability to access the capital markets and to restore normal banking relationships will be evaluated and notes that Tyco's term loan under its $3.855 billion 364-day revolver matures in February 2003. Moody's will also assess the company's ability to restore profitability to historical levels, especially within the Electronics segment, as well as cash flow generation in a new operating environment where Tyco expects more modest 10-15% organic growth and diminished acquisition activity. Although interim management has confirmed the new strategy and earnings expectation for the third quarter (ending June 30) and the full year (ending September 30), Moody's expects that achieving these financial results will be challenging.

Ratings downgraded, remaining under review for possible downgrade are:

Tyco International Ltd. -- Convertible debentures (Liquid Yield Option Notes) to Ba1 from Baa3; senior debt securities, subordinated debt securities, and preferred stock issued under its 415 shelf registration to (P)Ba1, (P)Ba2 and (P)Ba3 from (P)Baa3, (P)Ba1 and (P)Ba2, respectively.

Tyco International Group S.A. -- Senior notes and debentures to Baa3 from Baa2, guaranteed by Tyco; senior debt securities and subordinated debt securities issued under its 415 shelf registration guaranteed by Tyco to (P)Baa3 and (P)Ba1 from (P)Baa2 and (P)Baa3, respectively; bank revolving credit facilities, guaranteed by Tyco, to Baa3 from Baa2; and the short-term debt rating, guaranteed by Tyco, to Prime-3 from Prime-2.

Tyco International (US) Inc. -- Senior unsecured notes and debentures to Baa2 from Baa1.

ADT Operations, Inc. -- Senior subordinated notes to Baa3 from Baa2; and subordinated Liquid Yield Option Notes to Baa3 from Baa2. Both are guaranteed by Tyco on a subordinated basis.

Raychem Corporation -- The $388 million senior, unsecured notes to Ba1 from Baa3.

Mallinckrodt Inc. -- Senior unsecured notes and debentures, and industrial revenue bonds to Ba1 from Baa3.

Ratings affirmed:

The CIT Group, Inc. -- A2 Senior and issuer rating; A3 Subordinated rating; and Prime-1 for short-term debt.

Newcourt Credit Group Inc., guaranteed by CIT -- A2 Senior rating

AT&T Capital Corporation, guaranteed by CIT -- A2 Senior rating.

CIT Capital Trust I, guaranteed by CIT -- Preferred Stock to "a2" from "a1."

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. Its finance subsidiary, The CIT Group, Inc., is one of the largest commercial finance companies in the United States with reported managed assets of nearly $50 billion at December 31, 2001.

New York
Robert Young
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
George A. Meyers
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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