TEXT-Fitch cuts ADT Corp's IDR to 'BBB', outlook is stable

Tue Nov 27, 2012 1:42pm EST

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Nov 27 - Fitch Ratings has downgraded the ratings of The ADT Corporation
 (ADT), including the company's Issuer Default Rating (IDR) to 'BBB' from
'BBB+'. The Rating Outlook remains Stable. A complete list of the rating actions
follows at the end of this release.

The downgrade reflects ADT's recently announced $2 billion share repurchase
program that will be funded by debt and free cash flow (FCF). The company's
board of directors announced today the authorization of a $2 billion share
repurchase program over a 3-year period. ADT expects to incur incremental debt
to finance these share repurchases and has targeted a leverage ratio as measured
by debt to EBITDA of 2x.

ADT expects to incur $650 million - $900 million of incremental debt in 2013 and
return approximately $900 million to $1 billion to shareholders in the form of
share repurchases and dividends. Based on the projected share repurchases and
debt levels, Fitch projects ADT's leverage will increase from approximately 1.6x
during fiscal 2012 (ending Sept. 28, 2012) to about 2x for fiscal 2013 and 2014.
Interest coverage is projected to range from 13x - 14.5x over the next two
years. Fitch had originally expected ADT to maintain leverage at around 1.5x and
interest coverage above 15x.

The downgrade also reflects management's willingness to undertake a more
aggressive financial strategy soon after becoming an independent company. These
actions also provide some uncertainty regarding management's financial policies
beyond the near term. Fitch will continually evaluate how management balances
demands from its shareholders while maintaining its commitment to an investment
grade profile.

ADT's ratings and Outlook reflect the company's strong brand recognition, its
national footprint and leading market position, recurring revenue base,
sustainable FCF generation and solid liquidity. Concerns include emerging
competition from non-traditional security service providers, risk associated
with operating as an independent public company, and contingent liabilities,
particularly tax liabilities, related to the spin-off.

The ratings incorporate ADT's strong competitive position as the largest
residential security provider in the U.S.. ADT currently has over six million
customers and a roughly 25% market share based on company estimates. ADT's
competitive position is supported by a nationwide network of over 200 branches,
4,500 sales professionals, and more than 3,800 installation and service
technicians. Additionally, ADT has nearly 400 certified dealers that generate
about 45% of the company's new accounts.

ADT's subscriber-based business requires significant upfront costs to generate
new customers. Capital expenditures, including dealer-generated accounts and
bulk purchases and subscriber systems, totaled $1.09 billion and $902 million in
2012 and 2011, respectively. Capital expenditures for 2012 represent
approximately 33% of annual revenues. Fitch expects capital expenditures to
approximate 35% - 40% of annual revenues in the next few years. Fitch estimates
that new customers yield an average cash payback of three years.

ADT has shown the ability to generate sustainable FCF in spite of the large
capital expenditures that it incurs. ADT's subscriber-based business and
recurring revenue stream contribute to steady income and cash flow. Revenues
have been relatively stable as approximately 90% of its annual sales are
recurring in nature. ADT generated roughly $406 million and $537 million of FCF
during 2012 and 2011, respectively. Fitch expects ADT will generate annual FCF
(FCF: Cash flow from operations less capital expenditures and dividends) of
approximately $275 million - $350 million during the next few years.

Fitch expects ADT will maintain liquidity of approximately $1 billion,
consisting of cash and availability under a $750 million revolving credit
facility. ADT does not have any debt maturities until 2017, when $750 million of
senior notes become due.

Fitch believes that ADT's competitive position will remain strong in the
near-to-intermediate term. However, ADT faces competition from non-traditional
security service providers. Several cable and telecom companies have introduced
interactive security services that compete with ADT. While the customer base of
these companies is substantially smaller than ADT at the current time, this
emerging trend could provide significant competition for ADT going forward. The
penetration rate for cable and internet providers is significantly higher
(60%-85% range) compared to traditional security providers (20% range). This
gives cable and telecom companies a larger customer base from which to sell
additional product offerings and/or bundle services at perhaps more competitive
prices.

ADT is run by a well-seasoned management team led by Naren Gursahaney, who
served as President of Tyco's ADT North American Residential business segment
prior to the spin-off. ADT has other executives with extensive company and
industry experience.

As part of the separation, ADT has entered into separation and distribution and
other agreements with Tyco and Pentair Ltd. (formerly Flow Control). This will
govern the relationship between the post-separation entities and provide for the
allocation of various assets (including trademarks) and liabilities and
obligations (related to asbestos, pension and tax-related matters).

ADT also entered into a Tax Sharing Agreement with Tyco and Pentair. This
agreement will govern the rights, responsibilities and obligations of the three
post-separation companies regarding certain tax matters. The Tax Sharing
Agreement outlines each company's share of certain tax liabilities. Tyco will be
responsible for the first $500 million of shared tax liabilities. ADT and
Pentair will share 58% and 42%, respectively, of the next $225 million of shared
tax liabilities. Finally, ADT, Tyco and Pentair will share 27.5%, 52.5% and 20%,
respectively, of shared tax liabilities above $725 million.

Future ratings and Outlooks will be influenced by broad economic trends, as well
as company-specific activity, particularly free cash flow trends and uses, debt
levels and liquidity position. Positive rating actions are unlikely in the near
to intermediate term as Fitch evaluates ADT's performance and management's
financial strategy as a stand-alone company. On the other hand, Fitch may
consider taking a negative rating action if there is meaningful deterioration in
ADT's financial results or management undertakes a more aggressive financial
policy, leading to diminished liquidity and higher debt levels. In particular,
negative rating actions could occur if ADT's leverage is consistently above
2.5x.

Fitch has downgraded the following ratings for ADT:
-- IDR to 'BBB' from 'BBB+';
-- Revolving bank credit facility to 'BBB' from 'BBB+';
-- Senior unsecured debt to 'BBB' from 'BBB+'.

Fitch has also affirmed the following ratings for ADT:
--Short term IDR 'F2';
--Commercial Paper 'F2'.

Additional information is available at www.fitchratings.com'. Fitch has
conducted a Rating Assessment Service for the ADT Corporation. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012)
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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