Sell Tyco paper if it rallies on CIT: Credit analyst

By Ronda Fears

Nashville, Tenn., June 13 - If Tyco's paper rallies on the IPO of CIT getting regulatory clearance, then Carol Levenson, director of research at Gimme Credit, suggests a swift exit as there remains some serious concerns at Tyco itself.

"News flashes and rumors about Tyco International (Ba2/BBB-) came fast and thick last night," Levenson said in a report Thursday.

"Unfortunately, the only good news during this good news, bad news evening came from an odd source, Moody's, which in the process of downgrading the company deeper into junk territory noted Tyco's offering documents for the CIT IPO had received the 'approval" of the SEC,'"

Why this important development was not announced by Tyco itself remains a mystery, she added.

"Naturally receiving SEC approval, especially given the turmoil surrounding the company's management and governance and the legal eagle sideshow, would be one more hurdle overcome," she said.

"But of much greater concern to us is how much cash Tyco is likely to raise and when."

After Tyco's stock fell another 25% during the day on rumors about a further delay in the CIT IPO and reports of new SEC investigations, the analyst noted that the company that once made a fetish out of investor communication was uncharacteristically quiet.

"It released a one-paragraph statement saying it had filed an amended registration statement for the IPO and a restated March 10-Q, reflecting a $4.5 billion goodwill impairment charge for CIT," Levenson said.

"You may recall previously the company had naively concluded CIT's fair value could actually exceed its book value by $1.5 billion. As we noted last week, according to interim management the goodwill issue was the only one of concern to the SEC, implying that restating goodwill equals SEC approval."

This version of the IPO document includes both the number of shares to be offered and the estimated proceeds, items the previous versions had left blank, and, she said, indicates some progress.

"Still later last night, Tyco released another one-paragraph statement saying the SEC had opened a formal investigation into the Kozlowski affair 'and any other issues that arise from that investigation.' Tyco also said it wasn't aware of any other pending investigation of accounting issues," Levenson said.

"Clearly this was an attempt to address the rumor the SEC was reopening previous accounting inquiries, which leaves us with nothing more than the amended documents themselves."

The "headline" revelation is Tyco's estimate of the proceeds from the IPO has been lowered from $6.8 billion to a range of $5 billion to $5.8 billion, she noted.

The goodwill impairment charge is a "Step 1" estimate, based on how the market might value each reporting unit on an earnings multiple basis at March 31.

A "Step 2" analysis will be completed by June 30, which will value the assets and liabilities of each CIT reporting unit, also as of March 31.

As the company has been downgraded since then, and market conditions have weakened, Tyco's stock, for example, has fallen 75% since March 31, additional impairment charges are likely if CIT is not sold, or a loss on disposal recorded if it is, the analyst said.

"Worsened market conditions have prompted the reduction of the IPO proceeds estimate by more than 25%," Levenson said.

"This range may still prove too optimistic, especially considering reports that Lehman already made and withdrew a $5 billion offer for CIT - before the company was downgraded and its value diminished further."

As for Tyco, the preliminary goodwill impairment charge increases the industrial unit's leverage to 49% from 45%, bringing it closer to violating its bank covenant leverage limit of 52.5%, she said.

Additional CIT-related charges would leave Tyco's industrial unit even less cushion for goodwill or restructuring charges of its own, she added.

"The SEC may have approved the CIT IPO, but it remains to be seen whether stock investors will," Levenson said.

"If bonds should rally today on this modicum of good news about the IPO progress, it would be a good opportunity to exit."

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