TEXT-Fitch revises TE Connectivity outlook to positive

Thu Jan 31, 2013 4:40pm EST

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Jan 31 - Fitch Ratings has affirmed the following ratings for TE
Connectivity Ltd. (NYSE: TEL, TE Connectivity) and its wholly owned
subsidiary, Tyco Electronics Group S.A. (TEGSA):

TE Connectivity:
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2'.

TEGSA:
--Long-term IDR 'BBB+';
--Short-term IDR at 'F2';
--CP program at 'F2';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.

Fitch has also revised TE Connectivity's Rating Outlook to Positive from Stable.
Fitch's actions affect approximately $3 billion of total debt.

The ratings and Outlook reflect Fitch's expectations that operating performance
and annual free cash flow (FCF) will continue strengthening (albeit cyclically).
The ratings and Outlook incorporate Fitch's expectations that financial policies
will remain conservative.

Fitch expects flat organic revenue growth for fiscal 2013. End markets should
remain soft through the first half of 2013. However, positive book to bill
metrics across nearly all segments should drive revenue growth in the back half
of fiscal 2013. A full year of sales from Deutsche should result in roughly 3%
to overall revenue growth.

Fitch anticipates low- to mid-single digit organic revenue growth over the
longer-term. TE Connectivity should benefit from secular demand drivers,
increasing end market diversification, and share consolidation given the
fragmentation in many of the company's end markets.

Operating EBIT margin should range from 10% to 15%. However, it may decline to
the mid-single digits during more significant downturns (typically lasting
two-to-four quarters). Fitch expects a consistent cadence of new product
introductions and productivity gains to offset typical product life cycle
related pricing pressures.

Over the near-term, Fitch expects operating EBIT margin to improve from the
Fitch estimated 13.1% for fiscal 2012. TE Connectivity's restructuring program
will reduce capacity and headcount in businesses serving comparatively weaker
networking and consumer end markets.

Fitch is increasingly confident in TE Connectivity's ability to consistently
achieve $1 billion of annual FCF, except during more significant downturns. Over
the intermediate-term, annual dividend growth, modest pension obligations and
cash restructuring will offset higher profitability.

During the 2008-2009 recession, FCF exceed $700 million and was driven by more
than $630 million of cash from inventory reductions. Fitch expects a repeat of
this pattern during future significant downturns. Capital spending should
decline closer to maintenance levels beyond fiscal 2013, also bolstering annual
FCF through the intermediate-term.

Fitch expects financial policies will remain conservative and that annual FCF
will be used for combination of share repurchases and acquisitions. Acquisitions
likely will be at least partially debt financed with TE Connectivity using
subsequent near-term FCF to bring total leverage (total debt to operating
EBITDA) below 2x.

Total leverage (total debt to operating EBITDA) was a Fitch estimated 1.3 times
(x). Interest coverage (operating EBITDA to gross interest expense) was 13.6x
for the latest 12 months (LTM) ended Dec. 28, 2012.

End markets remain choppy with weak automotive demand in Europe and Japan
offsetting strength in the Americas and China. Networks Solutions remains
challenged, given cautious carrier and enterprise spending. Strength from new
smartphone and tablet design wins is only partially offsetting weak demand for
personal computers (PC).

The ratings and Outlook reflect TE Connectivity's:

--Diversified geographic, end-market and customer portfolios, industry-leading
positions in large and relatively fragmented markets; and substantial scale and
scope, which should result in longer-term share gains in faster-growing
developing markets;
--Consistent annual FCF of more than $750 million; and
--Conservative financial policies, including solid liquidity and commitment to
managing debt levels to maintain total leverage target at or below 2x;

Fitch's rating concerns center on:

--The company's need to mitigate average selling price (ASP) pressures in the
majority of its end-markets with efficiency initiatives and new product
introductions, as well as vulnerability of gross profit margin over the
short-term to commodity price volatility;
--The cyclical demand patterns associated with electronics components;
--The company's use of cash for share repurchases and acquisitions, given mature
organic revenue growth prospects across certain key end-markets.

SENSITIVITY/RATING DRIVERS

Fitch may take additional positive rating actions if TE Connectivity:
--Consistently achieves $1 billion of annual FCF, supporting the company's
ability to maintain operating EBIT margins in the mid- to high end of Fitch's
anticipated 10%-15% range; and
--Moderates share repurchases when necessary to maintain targeted financial
policies.

Conversely, Fitch may take negative rating actions if :
--Operating profit margins fall below the 10%-15% range over the short-term,
likely due to TE Connectivity's inability to offset pricing pressures or
commodity price volatility with new product introductions and productivity
gains;
--TE Connectivity fails to moderate share repurchases to return total leverage
to below 2x, indicating a shift in financial policies; or
--Lower than anticipated annual FCF.

TE Connectivity's liquidity was solid at Dec. 28, 2012 and supported by:

--Approximately $972 million of cash and cash equivalents;
--An undrawn $1.5 billion, five-year revolving credit facility expiring June
2016. This credit facility backs up the company's up to $1.25 billion commercial
paper (CP) program.

Further supporting liquidity is Fitch's expectations for solid annual FCF.
Although legacy litigation issues essentially have been settled, the company
anticipates paying its share of legacy tax liabilities over several years.
Contributions to the company's pension plans over the next several years are
accommodated at existing ratings.

Total debt at Dec. 28, 2012 was approximately $3 billion and consisted of:

--$300 million of 5.95% senior notes due Jan. 15, 2014;
--$250 million of 1.6% new senior notes due 2015;
--$731 million of 6.55% senior notes due Oct. 1, 2017;
--$273 million of 4.875% senior notes due Jan. 15, 2021;
--$498 million of 3.5% new senior notes due 2022;
--$475 million of 7.125% senior notes due Oct. 1, 2037;
--$89 million of 3.5% convertible subordinated notes due 2015 (legacy ADC
Telecommunications notes);
--$350 million of borrowings under the company's CP program;
--Other debt of approximately $72 million.


Additional information is available at 'www.fitchratings.com'. 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. 12, 2011);
--'Rating Technology Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Technology Companies
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