Tyco Int still on S&P CreditWatch list
By Venkatachari Jagannathan | 19 Mar 2002
Tyco is the world's largest manufacturer and servicer of electrical and electronic components; the world's largest designer, manufacturer, installer and servicer of undersea telecommunications systems; the world's largest manufacturer, installer and provider of fire-protection systems and electronic security services; and the world's largest manufacturer of specialty valves.
The group, operating in more than 100 countries, also holds strong leadership positions in disposable medical products, financing and leasing capital, plastics and adhesives. The Bermuda-based Tyco has also begun the process of selling its plastics business; the transaction is expected to be completed in the next few months. The proceeds should total about $3 billion.
In addition, Tyco recently outlined a plan to spin off its wholly-owned subsidiary - the CIT group - to existing shareholders. Other methods of disposing of its interest in CIT are also possible. In any case S&P believes that the Tyco management is working towards a full separation of Tyco and CIT.
“If 100 per cent of CIT is spun off expeditiously with no cash proceeds to Tyco, Tyco's ratings would likely be raised to triple-B-plus and A-2,“ says S&P's credit analyst Cynthia Werneth. “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.“
She says if Tyco were to sell 100 per cent of CIT for cash, its long-term ratings would likely be raised even further. The rating agency assumes 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 output of its two convertible debt issues in 2003. These upgrade scenarios are based on the assumption that Tyco will be able to restore its bank-line availability.
But S&P also warns that the ratings could be lowered if liquidity does not improve during the next several months. Tyco's underlying business fundamentals are essentially unchanged, with its healthcare and fire- and flow-control businesses performing well.
The electronics and undersea cable businesses are suffering the effects of a cyclical downturn.
The management is monitoring developments in the fibre-optic capacity markets, where it has invested heavily during the past two years, and has indicated that impairment charges may be necessary. But they are not expected to be of a magnitude that would seriously damage credit quality.