S&P: CIT Sale Could Boost Tyco Rating

The rating agency says that if the financing company is sold for cash, the conglomerate's rating could benefit even more

Standard & Poor's ratings on Tyco International Ltd. and its industrial affiliates remain on CreditWatch with developing implications where they were placed Feb. 4, 2002. Developing implications means that ratings could be raised, lowered, or affirmed.

In the interim, Tyco has begun the process of selling its plastics business, and the transaction is expected to be completed during the next few months. Proceeds should total about $3 billion.

In addition, Tyco recently filed an SEC Form 10 which outlines a plan to spin off its wholly-owned subsidiary, The CIT Group Inc., to existing shareholders. Other methods of disposing of its interest in CIT are also possible. In any event, Standard & Poor's believes that Tyco management is working toward a full separation of Tyco and CIT.

If 100% of CIT is spun off expeditiously with no cash proceeds to Tyco, Tyco's ratings would likely be raised one notch. Even though this would represent the loss of a valuable asset without any direct benefit to Tyco debtholders, it would eliminate the risk to Tyco associated with CIT's refinancing profile.

If Tyco were to sell 100% of CIT for cash, its long-term ratings would likely be raised even further. It is assumed that a cash transaction, together with expected free cash generation, would provide sufficient liquidity for Tyco to repay debt coming due during the next two years and to fully fund the possible put of its two convertible debt issues in 2003. The possible rating actions outlined above presume that Tyco will be able to restore its bank line availability.

Ratings could be lowered if liquidity does not improve during the next several months.

Underlying business fundamentals are substantially unchanged, with healthcare and fire and flow control performing well. The electronics and undersea cable businesses are suffering the effects of a cyclical downturn. Management is monitoring developments in the fiber-optic capacity markets, where it has invested heavily during the past two years, and has indicated that impairment charges may be necessary. However, they are not expected to be of a magnitude that would seriously damage credit quality.

From Standard & Poor's CreditWire

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