Oct 2 () - Fitch Ratings has assigned the following ratings to The ADT
--Issuer Default Rating (IDR) 'BBB+';
--Short term IDR 'F2';
--Commercial Paper 'F2'.
Fitch is assigning these ratings along with a Stable Outlook in conjunction with
the spin-off of ADT from Tyco International, Ltd. (NYSE: TYC) on Sept. 28, 2012.
Fitch also has the following ratings for ADT:
-- Revolving bank credit facility 'BBB+';
-- Senior unsecured debt 'BBB+'.
ADT's ratings and Outlook reflect the company's strong brand recognition, its
national footprint and leading market position, recurring revenue base,
sustainable free cash flow (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 recently issued $2.5 billion of debt in connection with the spin-off. Fitch
expects ADT's credit metrics will be solidly in line with the 'BBB+' rating
category. Fitch projects pro forma leverage as measured by debt to earnings
before interest, taxes and depreciation and amortization (EBITDA) to be
approximately 1.5x to 1.8x. Additionally, Fitch projects EBITDA to interest to
be above 15x for fiscal 2012 (ending Sept. 28, 2012). Fitch currently expects
ADT to maintain these strong credit metrics through 2013.
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 $902 million and $801 million in
2011 and 2010, respectively. Capital expenditures represent approximately 30% of
annual revenues. 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 they incur. ADT's subscriber-based business and
recurring revenue stream contribute to steady income and cash flow. Revenues
have been relatively stable as approximately 89% of its annual sales are
recurring in nature. ADT generated roughly $537 million and $269 million of FCF
during 2011 and 2010, respectively. Fitch expects ADT will generate annual FCF
of approximately $400 million-$500 million during the next few years.
ADT's financial results tend to be more consistent from period to period
(relative to Tyco and Flow Control). As a result, ADT may undertake a more
aggressive financial strategy compared to its predecessor company. It doesn't
appear that ADT will employ high leverage in the near term. That said, there may
be strategic reasons to increase leverage in a manner that maximizes the
long-term value of ADT. Nevertheless, ADT is committed to a solid investment
grade rating. Fitch will continually evaluate how management will balance
demands from its shareholders while maintaining its commitment to a strong
investment grade profile.
Fitch expects ADT will maintain minimum 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 to which to sell
additional product offerings and/or bundle services at perhaps more competitive
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 also has leaders with extensive company and industry
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. As of June 29, 2012,
Tyco has recorded a liability of $406 million related to these tax matters.
Future ratings and Outlooks will be influenced by broad economic trends, as well
as company-specific activity, particularly free cash flow trends and uses 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 and management undertakes a more aggressive financial
policy, leading to diminished liquidity, higher debt levels and credit metrics
that are significantly and consistently below Fitch's expectations.
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).
Applicable Criteria and Related Research:
Corporate Rating Methodology