Fitch cuts Tyco ratings to junk

Fitch Ratings downgraded the senior unsecured debt of Tyco International Ltd. to BB from BBB, including the two 0% convertibles. The rating on the company's commercial paper was cut to B from F3.

All ratings remain on negative watch.

The downgrades reflect concerns about Tyco's liquidity and near-term maturity schedule, repeated changes in strategic direction, the impact of the company's recent troubles on operating cash flow, and shortcomings in corporate governance. The departure of CEO Dennis Kozlowski last week evidences the uncertainties and risks surrounding Tyco's ability to execute its most recent strategic plan. The company has affirmed its intention to sell CIT through an IPO in early July, an essential step in addressing the company's near-term debt maturities.

Although Fitch believes that the sale of CIT will occur, final proceeds are still open to question. The significant and unexpected changes in Tyco's strategy and management during the past several months, however, have damaged Tyco's credibility, and its ability to raise funds in the capital markets is extremely limited. Although Tyco is expected to have nearly $2.9 billion of cash on hand at the end of June 2002, the company is reliant on completing asset sales to meet its maturing debt obligations. Roughly half of Tyco's $27 billion of debt matures by the end of calendar 2003 with the largest portions due in February 2003 ($4.0 billion of bank debt and $2.3 billion of convertible debt) and in November 2003 ($3.6 billion of convertible debt). By the end of March 2003, Tyco expects to have a refinancing requirement of approximately $5.7 billion. This figure assumes a $2 billion operating cash balance requirement, no asset sales and the February 2003 putable convertibles are repaid in cash. The successful IPO of CIT will still leave Tyco reliant on external capital to meet maturing obligations. The shortfall includes the effect of free cash flow, estimated by the company to be $3.8 billion (before an estimated $1.9 billion of acquisition spending) for the next four quarters ending June 30, 2003 and assumes that roughly $700 million of securitizations and liabilities related to rating triggers are refunded or paid.

Any disruptions in selling CIT would likely entail further rating actions. Required refinancings that may become available upon the reestablishment of investor confidence will entail higher financing costs and more stringent credit terms. The company's balance sheet contains goodwill of $28 billion, and meaningful additional writedowns could potentially result in a covenant violation under Tyco's bank debt that includes a Debt/Capital restriction of 52.5%. Successful execution of the IPO, a significant uncertainty, would meaningfully ease the company's near-term maturity schedule.

Additional risks include Tyco's ability to meet internal cash generation forecasts due to weakness in the company's end markets and the impact of Tyco's problems on customer, supplier and employee relationships. Tyco's credit profile and debt ratings will be contingent not only on its ability to execute the sale of CIT and address its near-term maturities, but on the evolving capital structure policies and the degree to which Tyco allocates free cash flow to debt repayment or other uses. Longer term, the likelihood of Tyco continuing to operate as currently organized remains an important issue to be resolved by the company, and major structural changes could still occur. To a large degree, this will depend on the results of the search for a new CEO that Tyco has recently undertaken. The urgency of the numerous challenges facing Tyco may limit its operating and financial flexibility, a risk that is incorporated in Fitch's Negative Watch on Tyco's ratings.

Moody's puts Alpharma on review for downgrade

Moody's placed the ratings of Alpharma Operating Corp. under review for possible downgrade.Alpharma Operating, a subsidiary of Alpharma Inc., is a Fort Lee, N.J.-based generic drug company. Alpharma Inc. is controlled by A.L. Industrier AS, a Norwegian entity that is controlled by Alpharma's chairman, E.W. Sissener.

The review was prompted by the recently announced formal investigation by the SEC of Alpharma Inc.'s revenue recognition practices in connection with the restatements of earnings, which were completed in 2001.

Also due to lower operating earnings than anticipated, including unexpected material charges in 2001 for inventory writedowns, product recalls and restructuring actions, and the inspection observations received from the FDA in 2001 in particular regarding the company's Baltimore facility.

Significant charges were take in 2001 totalling $75 million, of which $48 million is related to the Faulding acquisition in the fourth quarter.

As of March 31, the company had $10 million of cash, availability under its revolving credit of $285 million, available short term lines of credit of $38 million and was in compliance of its credit faiclity agreement.

Moody's revises Fleming outlook to negative

Moody's revised Fleming Cos. Inc.'s outlook to negative from stable and confirmed its 5.25% convertible senior subordinated notes due 2009 at B2, along with other ratings.

Also, Moody's rated the company's proposed $950 million new secured credit facility at Ba2 and proposed $200 million eight-year senior notes at Ba3.

Proceeds from the new debt, with $200 million in new equity, will be used to refinance the old credit facility and to fund the $390 million acquisition of the convenience store distributor Core-Mark.

The ratings reflect a leveraged financial condition and that, while equity will increase by $200 million as a result of the transaction, funded debt will also increase by about $230 million with the potential for additional borrowings from the revolving credit facility.

Restraining the ratings are the uncertainty related to resolution of the Kmart bankruptcy and the large post-filing losses reported by Kmart, Fleming's largest customer with 20% of sales during 2001.

Directly, or indirectly through its customers, the company competes with respected retailers such as Wal-Mart, Target and the national supermarket chains.

The intense competition in the fragmented distribution industry, challenges in effectively integrating anticipated future distribution acquisitions and the necessity to replace clients lost in the consolidating supermarket industry also impact Moody's views of the risks facing Fleming.

However, the ratings recognize Fleming's status as the nation's largest food distributor, economies of scale the company can offer and its position as the only national grocery distributor.

Fleming's new position as the only national convenience store distributor alternative to McLane, a unit of Wal-Mart, could prove appealing to potential customers.

Ratings also consider the company's efforts to diversify its wholesale customer base, such as the recent supply agreement with Albertson's, and ongoing operating improvements in the company's wholesale and retail segments.

The negative outlook considers our belief that the ratings will be constrained until the status of Kmart becomes clearer and Fleming proves that the acquisition strategy provides acceptable returns.

Moody's does not believe that significant leverage and fixed charge coverage improvements can reliably be expected over the intermediate term.

Factors that could lead Moody's to consider a negative rating action include materially adverse affects from the Kmart situation, inability to replace the normal attrition of wholesale customers, or failure to effectively integrate the new acquisitions.

S&P sees Elan split positive, but no ratings impact

Standard & Poor's said Elan Corp. plc's (BBB-/stable) announced restructuring to reorganize under three business units is a positive development, as the reorganization will increase the transparency of Elan's operations and may help to restore recently shaken investor confidence over the company's prospects.

However, the development does not have an impact on the S&P ratings or outlook on Elan at this time.

The critical determinants of Elan's ratings will be the continued performance of its drug portfolio and the maintenance of the high level of liquidity as it approaches significant debt maturities over the next several years.

Given Elan's $2.4 billion in short-term cash and investments on hand, positive cash flows and limited near-term debt maturities, S&P does not have any current concerns regarding Elan's liquidity.

Although the company has publicly stated that it plans to acquire products in the near term, it has also stated that it will maintain a significant level of cash on hand at all times.

S&P says Baxter acquisition has no ratings impact

Standard & Poor's said that Baxter International Inc.'s (A/Stable/A-1) plan to acquire the generic injectable and patent-expired branded products of Wyeth Pharmaceuticals' ESI Lederle unit will not result in a rating or outlook change on Baxter.

Although the acquisition is not of such materiality that a rating change is warranted, it complements and strengthens Baxter's critical care and anesthesia portfolio and augments manufacturing capacity for injectable, small-volume drugs.

The $305 million cash purchase price can adequately be funded from availability under Baxter's $1.5 billion bank credit facilities and/or cash on hand, with minimal immediate impact on credit statistics.

S&P cuts Alpharma outlook

Standard & Poor's lowered its outlook on Alpharma Inc. to negative from stable. Ratings affected include Alpharma's senior secured debt and senior unsecured debt at BB-, convertible subordinated debt at B and Alpharma Corp.'s senior secured bank loan at BB-.

S&P said it revised Alpharma's outlook because of the deterioration in the company's financial performance over the past three quarters.

The company's generic drug and animal health businesses have suffered continuing difficult conditions. The generic drug business was hurt by two product recalls and a resultant slow down at its Baltimore facility and mandated price decreases that went into effect in some major European markets.

Meanwhile, the animal health business saw a revision of credit terms by Alpharma, resulting in a decrease in wholesaler inventories of swine and cattle products.

EBITDA margins for the first quarter 2002 declined to 14.7%, from 22% the same quarter 2001, S&P said.

The deterioration in financial performance also comes at a time when the company is more highly levered, having completed the $660 million debt-funded purchase of Faulding in December 2001, S&P added.

Although Alpharma has successfully delevered after each past acquisition and has retired over $245 million of debt in the past two quarters, EBITDA interest coverage of 1.9 times is weak for its rating category, S&P said.

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