Tyco Ratings Still on CreditWatch Negative

S&P says the company's ratings could be lowered if debt is not reduced meaningfully following the IPO of its CIT unit

On July 2, 2002, Standard & Poor's said that the 'BBB-' corporate credit ratings on Tyco International Ltd. and its industrial subsidiaries remain on CreditWatch with negative implications following the completion of the IPO of Tyco's commercial finance subsidiary, the CIT Group Inc. Hamilton, Bermuda-based Tyco is a diversified company with total debt of about $26 billion.

The IPO is an important step in strengthening Tyco's liquidity. Management intends to use IPO proceeds totaling $4.6 billion, together with a significant portion of cash balances (between $2.5 billion and $3.0 billion currently) to reduce debt. During the next 18 months, the company will have public and bank debt maturities totaling about $6.8 billion, plus the potential "put" of two zero-coupon debt issues totaling about $5.9 billion. (Tyco has the option to satisfy $2.3 billion of the latter amount in common stock at the February 2003 put date. However, it may choose not to do so because at the current low common share price, this would cause significant dilution.)

Debt reduction will also increase financial flexibility under the maximum-debt-to-capital covenant in the company's bank loan agreements. Following the writedown of its investment in CIT in the restated March, 2002, quarter and the further writedown of about $2 billion that will be required in the June 2002 quarter (before any sale proceeds are received), this ratio should be approximately 50% (the covenant limit is 52.5%).

Removing the ratings from CreditWatch will depend on management's addressing the gap between IPO proceeds, cash balances, and operating cash flow (expected to total about $3 billion in the current fiscal year) and obligations coming due in the next 18 months. This could be done through a combination of restoring bank line availability, selling additional assets, and accessing the public capital markets. Standard & Poor's will continue to monitor developments in connection with the ongoing investigations by the Manhattan District Attorney's office and the SEC of alleged tax evasion by Tyco's former CEO, as well as corporate governance issues. Standard & Poor's will also continue to monitor the performance of Tyco's still well-diversified business portfolio and its efforts to stem any damage recent events have had on customer, supplier, or employee relationships. Standard & Poor's will also seek clarification of business and financial strategies once a new CEO is in place.

Ratings could be lowered if:

• Debt is not reduced meaningfully in the near term;

• The company does not address in a timely manner obligations coming due late in calendar-year 2003; or

• There are further negative developments in connection with regulatory or law enforcement agency investigations.

Tyco should have sufficient liquidity to repay obligations that might be triggered by recent rating downgrades. These include accounts receivable securitization programs ($530 million outstanding as of March 31, 2002), 30 billion yen ($225 million) of notes due 2030, partly offset by proceeds expected from the potential termination of various interest rate swaps.

Depending on the company's future capital structure (including the possibility that security could be granted or other developments could cause structural subordination), the ratings on debt obligations that Standard & Poor's currently rates in the investment-grade category could be lowered even if the corporate credit rating remains unchanged.

From Standard & Poor's CreditWire

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