Fitch Rates ADT's Proposed Sr. Unsecured Notes Offering 'BBB'; Outlook
CHICAGO -- January 7, 2013
Fitch Ratings has assigned a 'BBB' rating to the ADT Corporation's (NYSE: ADT)
proposed offering of senior unsecured notes. The new issue will be equal in
right of payment with all other senior unsecured debt. Proceeds from the notes
issuance will be used primarily for share repurchases. In November 2012, the
company's board approved a $2 billion share repurchase program over a
three-year period that will be funded by debt and free cash flow (FCF).
The Rating Outlook is Stable. A complete list of ratings follows at the end of
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 its spin-off from Tyco International,
The ratings also reflect management's willingness to undertake a more
aggressive financial strategy soon after becoming an independent company. The
recently announced $2 billion share repurchase program that will be funded by
debt and FCF creates 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 expects to incur $650 million to $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 this year. Based on the projected
share repurchases and debt levels, Fitch projects ADT's leverage will increase
from 1.6x during fiscal 2012 (ending Sept. 28, 2012) to about 2x for fiscals
2013 and 2014. Interest coverage is projected to range from 13x - 14.5x over
the next two years.
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 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 had $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 about $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
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. These
competitors have a larger customer base from which to sell additional product
offerings and/or bundle services at perhaps more competitive prices.
As part of the separation, ADT has entered into separation and distribution
and other agreements with Tyco and Pentair Ltd. (formerly Flow Control). 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 FCF 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 currently rates ADT as follows with a Stable Outlook:
--Issuer Default Rating 'BBB';
--Revolving bank credit facility 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--Commercial Paper 'F2'.
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. 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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Fitch, Inc., 70 West Madison, Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)
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