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Rating Action:

MOODY'S RAISES TYCO'S DEBT RATINGS (SENIOR TO Baa3); ASSIGNS STABLE OUTLOOK

03 Jun 2004
MOODY'S RAISES TYCO'S DEBT RATINGS (SENIOR TO Baa3); ASSIGNS STABLE OUTLOOK

Approximately $18 Billion of Debt Securities Affected

New York, June 03, 2004 -- Moody's Investors Service has raised 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"), to Baa3 and Prime-3, respectively. The rating outlook is stable.

The rating actions reflect Tyco's improved operational performance and more sound financial condition, following the actions taken by the new management team to focus on margin expansion, organic growth, and debt reduction. Despite the challenges of the prior management scandals and litigation overhang, Moody's noted that Tyco's business have remained relatively strong, stemming from highly diversified operations (both by product and geography), leading market positions and strong brand names. The action also reflects the company's announced plan to accelerate debt reduction, both on- and off-balance sheet, and to voluntarily contribute additional funds to its U.S and International pension plans. Moody's anticipates that Tyco will continue to pay down debt from increasing free cash flow due to further margin expansion as a result of organic growth, implementation of cost initiatives, and net proceeds from asset sales. The rating agency added that the resultant significant improvement in debtholder protection measures should be enhanced over the near-to-intermediate-term.

Moody's added that the stable outlook anticipates that Tyco will prudently allocate its growing 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.

Ratings upgraded with stable outlook are:

Tyco International Group S.A. -- Senior implied rating to Baa3 from Ba2; long-term issuer rating to Baa3 from Ba2; senior notes and debentures to Baa3 from Ba2; Shelf registration ratings for senior debt securities to (P)Baa3 from (P)Ba2 and for subordinated debt securities to (P)Ba1 from (P)Ba3; senior unsecured debt rating for the $1.5 billion senior, unsecured bank revolving credit agreement due 12/22/06 to Baa3 from Ba2; and the senior unsecured debt rating for $1.0 billion 364-day bank revolving credit with a final maturity of December 20, 2004 to Baa3 from Ba2; and short-term debt rating to Prime-3 from Not Prime. These debt obligations and shelf registration are guaranteed by Tyco International Ltd. Because Tyco's senior debt is now rated investment grade, the senior implied and issuer ratings will be withdrawn.

Tyco International Ltd. -- Shelf registration ratings for senior debt securities to (P)Ba1 from (P)Ba3, for subordinated debt securities to (P)Ba2 from(P)B1, and for preferred stock to (P)Ba3 from (P)B2. Debt securities issued at the Bermuda holding company would be structurally subordinate to debt securities raised at the TIGSA level.

Tyco International (US) Inc. -- Senior unsecured notes and debentures to Baa2 from Ba1. 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. Approximately $389 million remain outstanding.

ADT Operations, Inc. -- Subordinated Liquid Yield Option Notes to Baa3 from Ba2, 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. Approximately $24 million remain outstanding.

Ratings confirmed:

*Raychem Corporation -- the Ba3 rating on the notes

*Mallinckrodt Inc. -- the Ba3 rating for notes, debentures and industrial revenue bonds

*Moody's notes that Tyco is currently contemplating a legal assumption or guarantee of the Raychem and Mallinckrodt notes that, upon receipt of final documentation, could result in an upward ratings revision. If the company does not legally assume or guarantee these debt obligations, the ratings will be withdrawn.

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, sale of underperforming businesses and improving economic conditions. As a result of its improved performance, the company recently revised its free cash flow target for the fiscal year 2004 to $4.0 billion from the previous guidance of $3.2 billion. Each of the business segments generate positive free cash flow.

For the latest twelve month period ending March 31, 2004, the company's operating profit as a percentage of sales increased to 13% from 11% at the end of fiscal 2003, and free cash flow improved to over $4.44 billion from $3.213 billion. The company's free cash flow-to-adjusted debt ratio (excluding the $740 million underfunded pension position in the U.S.) improved to 18.4% from 11.6%, interest coverage improved to 4.6x from 3.4x, and return on average assets improved to 8.0% from 6.2%.

The company has announced actions to accelerate debt reduction both on- and off-balance sheet, over the next several quarters. Excess cash above $2 billion will be used to pay down debt including its accounts receivable securizations programs, subsidiary debt, and convertible debt. Tyco will also make additional voluntary contributions to its U.S and International pension plans in excess of $500 million.

.

Tyco's speculative grade liquidity rating of SGL-1 has also been confirmed, reflecting the strong free cash flow generation, $3.1 billion of unrestricted cash on the balance sheet as of March 31, 2004, and $2.375 billion of unused bank credit facilities with ample headroom with respect to financial covenants and material adverse change language only at closing. Except for accounts receivable securizations that are expected to be paid off, Tyco's assets are unencumbered. The company is also in the process of selling businesses with combined revenues of over $2 billion. As a result, Moody's stated that the company is expected to internally fund its obligations (increasing capital spending and R&D needs, and debt maturities) over the next several quarters, while significantly reducing its on- and off-balance sheet debt load as planned. Moody's noted, however, that the company still faces challenges related to the ongoing investigations and legal actions, and that the potential financial impact remains uncertain. Because Tyco's senior debt is now rated investment grade, the SGL-1 rating will be withdrawn.

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.

Jersey City
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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