-- Switzerland-based Tyco International Ltd. has completed the separation
of its North American residential security and its flow control businesses.
-- We are affirming our 'A-' long-term and 'A-2' short-term corporate
ratings on Tyco and wholly owned finance subsidiary Tyco International Finance
-- We are lowering our issue-level ratings on Tyco's and TIFSA's senior
unsecured notes to 'BBB+' from 'A-', one notch below the corporate credit
rating, and are removing the ratings on these notes from CreditWatch with
-- The outlook is stable, reflecting our expectation that the company
will calibrate its acquisition and shareholder returns spending to its cash
flow generation, such that leverage remain at about 2x, consistent with our
expectations for the rating.
On Oct. 3, 2012, Standard & Poor's Ratings Services affirmed its 'A-'
long-term and 'A-2' short-term corporate ratings on Tyco and wholly owned
finance subsidiary Tyco International Finance S.A. (TIFSA). The outlooks are
We are lowering our issue-level ratings on Tyco's and TIFSA's senior unsecured
notes to 'BBB+' from 'A-', one notch below the corporate credit rating, and
are removing the ratings on these notes from CreditWatch with negative
implications, where they were placed on Sept. 19, 2011.
The affirmation of the 'A-/A-2' corporate credit ratings follows the
completion of Tyco's separation into three separate entities and our
expectation that Tyco will maintain a "strong" business risk profile and an
"intermediate" financial risk profile. The downgrade of the senior unsecured
notes rating to one notch below the corporate credit rating reflect the
elevated degree of structural subordination of Tyco and TIFSA's debt
obligations to priority liabilities at the companies' operating subsidiaries.
Following the completion of the spin-offs of its North American residential
security business and flow control businesses, we expect Tyco to continue to
operate with credit metrics that are adequate for the 'A-' rating. In
particular, while acquisitions, shareholder distributions, and the company's
exposure to cyclical construction markets may at times result in leverage that
is somewhat higher than at separation, we expect debt to EBITDA will not
meaningfully exceed 2x more than temporarily.
We consider Tyco's business risk profile to be strong. The company is the
global leader in its industry, with a No. 1 share (we estimate it to be about
10%) in highly fragmented global markets. Its portfolio of product and service
capabilities is among the most comprehensive in the sector and it benefits
from well-known brands and a balanced global footprint, with good exposure to
faster-growing emerging markets. Within its commercial markets, Tyco has broad
customer diversity spanning the retail, industrial, institutional, and energy
In addition, business stability benefits from the significant proportion of
recurring revenues (about 45%) derived from relatively stable service
contracts. This has in the past, and should continue to, help temper the
cyclicality of the product and installation businesses and the company's
exposure to construction and business investment cycles.
Business risks include the company's exposure to economic, competitive, and
technological trends affecting the commercial security and fire protection
markets and to commercial construction cycles and markets. The industry is
fragmented and competitive and Tyco competes with a few other global security
and fire protection service providers, which sometimes have more extensive
building management and integration capabilities, and with a multitude of
smaller regional or local players.
Tyco's profitability, with our expectation for 2012 EBITDA margins in the
mid-teens, is average for the capital goods sector and similar to margins of
other participants in the security and safety industry or large industrial
companies with whom Tyco competes (including United Technologies Corp.'s CCS
division, Stanley Black & Decker, Ingersoll-Rand PLC). The company's
operations are less capital-intensive than prior to the divestiture of the
residential security business, but still somewhat more than its peers, at
about 4% of sales. About 50% of capital expenditures relate to company-owned
security systems installed in customer's premises outside of North America.
Factors that will influence profitability include the company's ability to
adjust its corporate expenses to its reduced size (managements expect these to
be about $225 million annually), trends in raw material and labor costs,
trends in attrition rates, and the intensity of price competition for the
company's products and services, especially for system installations and
certain commoditized product lines.
We characterize Tyco's financial profile as intermediate. In connection with
the spin-offs, Tyco has reduced its debt to $1.5 billion from about $4 billion
previously. Adjusting for operating leases, postretirement obligations, and
for our assumption of up to $500 million in contingent tax liabilities, Tyco's
financial leverage is slightly below 2x and funds from operation to total debt
According to the 2012 tax-sharing agreement, Tyco retains up to $500 million
of pre-2007 legacy tax liabilities, and would share any additional liabilities
with ADT Corp. and Pentair Ltd. As of June 30, 2012, the company had reserved
$406 million for these matters, and an additional $72 million was recorded
upon separation. The ultimate amounts and the timing of possible cash outflows
remain undetermined, however, and the company expects to litigate certain
unresolved matters. Should liabilities ultimately significantly exceed the
$500 million that we have assumed, the rating could come under pressure.
We rate Tyco and TIFSA's senior unsecured notes 'BBB+', one notch below the
corporate credit rating. Tyco guarantees the obligations, and as was
previously the case, the notes do not benefit from upstream guarantees from
operating subsidiaries. Assets at the parent and finance company are
essentially limited to investments in these subsidiaries. Although there is no
meaningful external financial indebtedness at the operating subsidiaries, we
estimate that the ratio of priority obligations (including trade payables,
pensions, and other obligations) at these entities to adjusted total assets
significantly exceeds our notching threshold of 20%, and has increased
postseparation. In addition, we also considered that the company's business
lines are now more focused, and we are placing less reliance on
diversification than before as a potential mitigating factor to the structural
disadvantage of the parent company's obligations. Both factors contribute to
the lowering of the issue-level rating.
The short term rating on Tyco is 'A-2'. We expect the company to maintain
"strong" liquidity. Following the redemption of $2.6 billion of debt as part
of the separation, Tyco's debt maturities are now essentially long term,
including about $258 million due in 2015, and $364 million due in 2019.
We have assumed the following liquidity sources in our analysis: Annual funds
from operations of about $1 billion, a cash balance of about $600 million, and
access to a $1 billion revolving credit facility that matures in 2017. The
facility backs-up commercial paper borrowings, and availability is governed by
financial covenants, including a leverage test of no more than 3.5x. We expect
Tyco to maintain adequate headroom over this requirement.
Liquidity uses we expect include capital expenditure of about $450 million
next year, and annual dividend payments that the company target will
approximate 30% to 35% of net income (or about $300 million in 2013). Cash
flow generation tends to be weak during the first quarter of the fiscal year
end because of seasonal working capital requirements, and to be strongest in
the third and fourth quarter. Other liquidity uses could include payments
related to contingent liabilities, acquisition, and share buybacks.
The outlook is stable. We expect financial leverage to remain at about 2x as
low- to mid-single-digit revenue growth and slow margin expansion provide for
moderate profit growth and management uses free cash flow for growth and
We could lower the ratings if either weak global commercial construction
activity or lower capital spending in key end markets such as retail or oil
and gas cause revenues to decline more than 10% along with EBITDA margin
falling toward 13%. We could also downgrade the company if more aggressive
acquisition or buyback activity, or an unexpected significant increase in
contingent liabilities causes leverage to exceed 2x and FFO to fall and remain
We could raise the rating if Tyco further diversifies its business portfolio
and shows sustained improvement in EBITDA margin and return on capital
measures, and if the company continues to make progress toward the resolution
of its contingent liabilities while maintaining financial policies consistent
with a higher rating, such as FFO to total debt of 45% to 50%.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Tyco International Ltd.
Corporate Credit Rating A-/Stable/A-2
Tyco International Finance S.A.
Corporate Credit Rating A-/Stable/--
Commercial Paper A-2
Rating Lowered; CreditWatch Action
Tyco International Finance S.A.
Senior Unsecured BBB+ A-/Watch Neg