TEXT-Fitch affirms Tyco International's ratings at 'A-' on completion of separation
Oct 03 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term debt ratings at 'A-' for Tyco International Ltd. (Tyco; NYSE: TYC) and Tyco International Finance S.A. (TIFSA) following completion of the separation transaction on Sept. 28, 2012. The Rating Outlook for Tyco is Stable. A full list of ratings follows at the end of this release.
TIFSA is a wholly owned direct subsidiary of Tyco International Ltd. which guarantees TIFSA's debt. The structure of the separation was similar to what was anticipated by Fitch and included the spin-offs of the ADT North America Residential (ADT) and Flow Control (Flow) businesses. Flow was acquired by Pentair immediately after the separation. Following the separation, Tyco consists of the commercial fire and security businesses which provide services, installation and products on a global basis.
The rating affirmation reflects Fitch's expectation that Tyco will generate consistent operating results and free cash flow and maintain modest leverage. Total debt following the separation is approximately $1.5 billion which translates to debt/EBITDA of roughly 1.0x. This level is somewhat lower than leverage prior to the separation and provides financial flexibility to pursue the company's strategy to expand in selected markets, further improve its cost structure, and fund contingent liabilities related to the separation. Tyco's liquidity is sufficient to support its operations and financial obligations and includes approximately $600 million of cash and a $1.0 billion bank credit facility. There are no material debt maturities scheduled until 2015. An 8.5% note due in 2019 ($364 million outstanding) is puttable in July 2014.
Tyco's Fire & Security business generates slightly more than $10 billion of annual revenue. It is the largest provider in many of its global markets and generates nearly 30% of revenue from recurring services. Recurring revenues tend to be fairly stable through the business cycle and mitigate cyclicality in the installation business. Tyco expects to further integrate the fire and security businesses and consolidate numerous locations which should improve the company's cost structure and support a gradual improvement in profitability. As a more focused business, Tyco is focused on expanding in emerging markets, growing the attractive services business, and improving project selectivity.
Fitch expects Tyco to generate sufficient FCF to fund capital expenditures at around 4% of revenue, much of which will be used to expand into strategic markets. Other uses of cash include any payments required for contingent liabilities, and moderate bolt-on acquisitions which could occur as the industry gradually consolidates. Fitch estimates FCF in 2013 after pension contributions and dividends could be near $400 million. Tyco's financial performance will depend on non-residential construction activity, economic conditions in emerging regions where much of the company's growth is expected to be located, and planned reductions in the company's cost structure.
Rating concerns include liabilities shared with Tyco's separated businesses, protracted weakness in non-residential construction, and the timing for completing the consolidation of the fire and security businesses. Some of Tyco's fire and security operations are still integrated with ADT, and separating the operations is expected to take up to two years. Also, Tyco's product business sells some products to ADT, but typically at arm's-length which reduces the risk of a disruption in revenue.
Tyco retained a majority of contingent liabilities related to the separation. Future asbestos claims are partially offset by insurance assets, and environmental liabilities are not expected to be material. Cash outflows for shared tax liabilities could potentially be significant, however, including liabilities associated with Tyco's 2007 separation. Tyco is responsible for the first $500 million of shared tax liabilities and 52.5% of shared tax liabilities for incremental amounts above $725 million. Reserves for tax liabilities totaled $406 million at June 29, 2012. Tyco is also retaining the majority of pension liabilities and legacy litigation liabilities related to antitrust matters, the Foreign Corrupt Practices Act, and other items. Net pension obligations, excluding amounts assumed by ADT and Flow, totaled $517 million ($325 million U.S., $192 million international) as of Sept. 30, 2011.
Fitch could take a positive rating action if Tyco generates stronger operating results as a smaller, more focused company and if shared contingent liabilities decline over time. The ratings or outlook could be negatively affected if global economic conditions worsen materially, particularly in the non-residential construction sector, or if contingent liabilities are unexpectedly large. The ratings could also be negatively affected if the management team were to materially alter its financial or operating strategies.
Fitch has affirmed the ratings for Tyco as follows:
Tyco International Ltd.
--IDR at 'A-';
--Senior unsecured notes at 'A-';
--Short-term IDR at 'F2'.
Tyco International Finance S.A.
--IDR at 'A-'
--Senior unsecured revolving credit facilities at 'A-';
--Senior unsecured notes at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
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