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S&P Lowers Ratings on Tyco


On Feb. 4, Standard & Poor's lowered its ratings on Tyco International Ltd. (TYC) and its industrial subsidiaries and placed them on CreditWatch with developing implications following the company's announcement that it intends to borrow under its $5.9 billion credit facilities ($3.9 billion maturing February 2003 and $2 billion February 2006) to repurchase its $4.5 billion commercial paper at its scheduled maturities. To date, these credit facilities had been used exclusively to back-up commercial paper.

S&P lowered Tyco International's corporate credit rating three levels to triple-B from single-A, and its commercial paper rating to "A-3" from "A-1". Developing implications means that ratings could be raised, lowered, or affirmed.

Standard & Poor's believes that the company's decision to draw down these facilities indicates the company's uncertainty regarding its continued access to commercial paper markets as well as the possible erosion of bank support to renew the $3.9 billion credit facility (originally due Feb. 6, 2002, under which the company has exercised its one-year term-out option). This is occurring after a significant decline in the company's stock price and an increase in spreads on its bonds during the past several weeks.

One reason for the volatility in Tyco's stock and bond prices is market uncertainty regarding the company's accounting practices. However, questions regarding the company's accounting practices have been answered to Standard & Poor's satisfaction.

Importantly, Tyco appears to no longer have the free access to capital markets enjoyed by single-'A'-rated companies. However, proceeds from the bank credit facilities, together with existing cash balances and expected free cash generation, should be sufficient to meet the company's liquidity needs for the next several months, even without receipt of proceeds from planned asset sales and the IPOs and spin-offs of three divisions. However, external financing would likely be required to meet debt maturities in 2003.

Tyco has revised its earnings guidance slightly for the current fiscal year to reflect higher interest costs. Based on current market conditions, the company still expects to generate free operating cash flow of about $4 billion, which would be more than adequate to support the lowered ratings in the absence of liquidity concerns. The company intends to use a majority of free cash flow to reduce debt. Tyco is not expected to announce any major acquisitions or undertake significant share repurchases while it proceeds with its plan to divide the company. Underlying business fundamentals appear unchanged, with weakness in the electronics segment offset to a large extent by strength in the company's other businesses.

The new ratings reflect Standard & Poor's assumption that the company will eventually regain access to capital markets. However, ratings could be lowered if liquidity is further constrained for any reason. Ratings could be raised if the company is successful in selling assets or using IPO proceeds to reduce debt and regains access to traditional funding sources. From Standard & Poor's RatingsDirect


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