New York, March 28, 2022 -- Moody's Investors Service ("Moody's") upgraded Tyco Electronics Group S.A.'s ("Tyco Electronics" or "Tyco") senior unsecured rating to A3 from Baa1. Tyco Electronics is the primary debt issuing subsidiary of TE Connectivity Ltd. ("TE Connectivity") and directly or indirectly owns all its operations. Moody's also affirmed Tyco's short term P-2 rating. The outlook is stable.
"Tyco managed through the pandemic with only moderate impact to its business and rebounded strongly through 2021" commented Moody's Senior Credit Officer Matthew Jones, lead analyst for the company. Jones further noted "the performance highlights their ability to manage through down cycles in the underlying auto industry, their largest end market." The upgrade reflects Moody's expectation of continued conservative financial policies as well as the company's large scale ($15.2 billion in revenues in the LTM period ended December 24, 2021) and strong credit metrics (Debt/EBITDA of 1.5x and EBITA/Interest of 34.1x for the same period) which compare favorably to many other global manufacturing peers rated in the A rating category. Tyco's long term business outlook is supported by the ever-increasing amount of electronic content in automobiles, trucks, factories, medical devices, consumer goods and infrastructure and transportation equipment. While Tyco can be impacted by end market and broad economic cycles, the company has significant experience managing through downturns and adjusting relatively quickly to changes in demand as well as preserving a strong balance sheet to support the business during periods of stress.
RATINGS RATIONALE
Tyco Electronics' A3 unsecured rating reflects the company's scale, leading positions within the electronic connector industry, conservative financial policies, strong credit metrics, ample liquidity, and geographic and end customer diversification. Tyco's strong market position is highlighted by the integrated relationships the company has with many customers, the critical nature of the products, and the relatively high degree of engineering that is involved in the design and manufacture process. Nonetheless, end markets in the connector industry are cyclical, and cycles can be further exaggerated by swings in inventory levels in the distribution channel. Though revenues and EBITDA can decline materially in a downturn, Tyco tends to generate solid levels of free cash flow during a trough as working capital is released.
Tyco has significant concentration within the transportation and automotive end markets, which is offset to some degree by consistently increasing demand for electronic content in these sectors. The credit profile reflects the expectation of balanced financial policies including low leverage and strong liquidity, which should result in significant financial flexibility to address economic downcycles.
The stable outlook reflects our expectation for conservative financial policies, including balancing stock buybacks, acquisitions and other obligations within the cash generating capabilities of Tyco. The stable outlook accommodates moderate economic cycles. Our base case assumes a continuing recovery in 2022 but tempered by ongoing supply chain and inflationary challenges. Tyco Electronics revenues declined early in the pandemic driven primarily by the dramatic decline in the auto industry but rebounded strongly in 2021 despite supply chain constraints.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Tyco further diversifies its end markets and further demonstrates a commitment to conservative financial policies including maintaining very strong liquidity. The ratings could be downgraded if Moody's expects leverage to exceed 2.5x for an extended period, liquidity to deteriorate, or financial policies to become more aggressive (including issuing debt for share-buybacks). Although the ratings accommodate most economic cycles, the ratings could be downgraded, or outlook changed to negative during a prolonged or unusually severe recession.
Like other specialty manufacturing companies, Tyco Electronics has low social risks outside of the pandemic. Tyco has moderate environmental risk associated with its manufacturing facilities but this is not a material rating driver. TE Connectivity is a publicly held company with an independent Board of Directors. Moody's expects the company to maintain conservative financial policies over the long term.
TE Connectivity's robust liquidity is supported by the expectation of solid free cash flow over the long term and ample cash balances. The company produced free cash flow (as defined by cash flow from operations less capex and dividends) of about $1.2 billion for the twelve months ended December 24, 2021, with cash on hand of about $1.0 billion. Tyco Electronics' undrawn $1.5 billion revolving credit facility due 2023 (unrated) also supports liquidity. The bank credit facility serves as an alternate source of liquidity for the commercial paper program. The Prime-2 short term rating reflects the strong liquidity position and relatively conservative credit metrics and financial practices.
The following ratings were affected:
Upgrades:
..Issuer: Tyco Electronics Group S.A.
....Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1
Affirmations:
..Issuer: Tyco Electronics Group S.A.
....Senior Unsecured Commercial Paper, Affirmed P-2
Outlook Actions:
..Issuer: Tyco Electronics Group S.A.
....Outlook, Remains Stable
The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Tyco Electronics Group S.A. is the Luxembourg based holding company and debt issuing subsidiary of unrated TE Connectivity Ltd. Tyco Electronics directly or indirectly owns substantially all of TE Connectivity's operations. Financial reporting is issued by TE Connectivity. TE Connectivity is one of the world's leading suppliers of engineered electrical connectors, sensors and components. In June 2007 TEL was spun off from Tyco International Ltd. as a stand-alone public company.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Matthew B. Jones
VP - Senior Credit Officer
Corporate Finance Group
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Stephen Sohn
Associate Managing Director
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