TEXT - S&P raises TE Connectivity ratings

Wed Dec 26, 2012 3:31pm EST

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Overview
     -- TE Connectivity, a global Berwyn, PA-based designer and manufacturer 
of connectors and related products, continues to reduce leverage and maintain 
strong cash flows, despite a weak global economic environment.
     -- We are raising our corporate credit rating on the company to 'BBB+' 
from 'BBB'.
     -- The stable outlook reflects our expectation that TE's consistent 
earnings performance and strong cash generation will continue despite 
challenging market conditions.

Rating Action
On Dec. 26, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on TE Connectivity Ltd. to 'BBB+' from 'BBB'. In addition, we 
are raising our senior unsecured debt rating to 'BBB+' from 'BBB' and raising 
our rating on the subordinated debt to 'BBB' from 'BBB-'. Our 'A-2' commercial 
paper rating is unchanged. The outlook is stable

Rationale
The rating action reflects the company's strengthened business mix, given its 
ongoing successful integration of the ADC Telecommunications Inc. and Deutsch 
Group SAS acquisitions, as well as the company's consistent and strong cash 
flow generation. That cash flow generation has enabled it to repay debt and 
reduce adjusted leverage from the post-acquisition high of 2.1x in June to 
below 1.9x currently. We believe that leverage will continue to drop in the 
near term.

The rating reflects Standard & Poor's Ratings Services' expectations that the 
company will continue to benefit from moderate revenue growth in fiscal 2013 
and further improve margins from recent levels while reducing leverage.

Our "satisfactory" business risk profile is based on TE's leadership position 
in the fragmented connector market and specific strength as a supplier to the 
automotive industry, in addition to serving a diverse number of other end 
markets. Competitive pressures that require TE to continually invest in new 
product development and streamline manufacturing processes offset those 
strengths. In our opinion, TE's long-standing relationships create a large 
installed base of largely recurring revenue. While TE is not immune to 
cyclicality and commodity costs, we believe the diversity of markets and 
geographies provide some cushion against volatility and will support low- to 
mid-single-digit organic growth rates in the near and intermediate term. TE's 
organic growth rate is based on the increasing digital content in the 
automotive market and continued global investment in telecommunications 
infrastructure. The $2.0 billion acquisition of Deutsch Group in 2012 gave TE 
a leadership position in the harsh industrial and aerospace environment 
connectivity space, as well as strengthened its position in the industrial 
equipment sector. This followed the $1.3 billion acquisition of ADC 
Telecommunications in the prior year, which improved the company's position in 
network solutions. In our assessment, the company's management and corporate 
strategy is satisfactory.

TE continues to streamline its manufacturing footprint, reducing plants, 
labor, and overhead and moving to lower cost locations. We expect it to 
maintain consistent adjusted annual EBITDA margins in the mid-to-high teens as 
a percent of revenue, despite volatility in raw material costs. We expect 
leverage to gradually improve over the intermediate term, based on consistent 
margins and increasing revenues as well as debt repayment. As of fiscal 2012 
year-end--adjusting for the $714 million debt issue repaid in October from 
cash and including a $450 million debt-like equivalent for TE's potential 
legacy tax settlement--leverage was below 1.9x compared with 2.1x at the time 
of the Deutsch acquisition and 1.7x at Dec, 2011. With cash flows exceeding $1 
billion and continued earnings growth, we expect further reductions in 
leverage in 2013. The company continues to maintain an intermediate financial 
risk profile.

Liquidity
We rate TE's commercial paper 'A-2', and expect TE to maintain "adequate" 
liquidity. Cash sources include cash and short-term investment balances of 
nearly $1.6 billion as of Sept. 28, 2012 (which the company reduced by $714 
million with the repayment in October of the outstanding 6% senior notes), 
expected annual free operating cash flow of about $1 billion, and a revolving 
credit facility of $1.5 billion, which matures in 2016.

We expect uses to include capital expenditures of about $600 million, 
dividends of about $350 million, and some investment in working capital to 
support expected growth. We expect TE to continue to balance growth 
initiatives and shareholder returns, and to prudently manage share repurchase 
programs by limiting activity to annual free cash flow generation. The company 
has $1.3 billion available under its existing share repurchase program. 
Although the company stopped repurchases for a period in the wake of the 
Deutsch acquisition, it has since resumed them as its financial metrics have 
approached pre-acquisition levels.

Our assessment of TE's liquidity profile incorporates the following 
expectations, assumptions, and factors:
     -- We expect coverage of uses to exceed 15x for the next 12 months, and 
net sources to be positive in the near term, even with a 15% decline in 
expected EBITDA.
     -- TE has ample headroom under its one performance covenant--funded debt 
to EBITDA not to exceed 3.5x--and is likely to retain adequate headroom even 
if EBITDA were to decline by 20%.
     -- Debt maturities are manageable in our view with no more debt due in 
fiscal 2013 and $377 million due in fiscal 2014, which can be repaid with cash 
on hand.

Outlook
The rating outlook is stable, reflecting the company's consistent earnings 
performance and strong cash generation despite ongoing challenging market 
conditions. We could lower the rating if the company were to pursue 
shareholder initiatives or acquisitions that caused leverage to be sustained 
in the low-2x area. We could raise the rating if leverage were to be sustained 
below the mid 1x area and the company continued to improve its margins, while 
growing sales in line with the market.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008


Temporary contact number: Jacob Schlanger (917-371-5651)


Ratings List

Upgraded; Outlook Action/Ratings Affirmed
                                        To                 From
TE Connectivity Ltd.
 Corporate Credit Rating                BBB+/Stable/A-2    BBB/Positive/A-2
 Subordinated                           BBB                BBB-

Tyco Electronics Group S.A.
 Senior Unsecured                       BBB+               BBB

Ratings Affirmed

Tyco Electronics Group S.A.
 Commercial Paper                       A-2
FILED UNDER: