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
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.
*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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
George A. Meyers
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service