Tyco launches $3.25 billion two-part deal; talked at 3.0-3.5%, up 28-32% and 3.125-3.625%, up 22-26%

By Ronda Fears

Nashville, Jan. 6 - Tyco International Ltd. launched a two-part $3.25 billion convertible deal after the close Monday. Market sources are hopeful it will be a blockbuster deal that will set a better tone in the convertibles market for the year to come.

"This is maybe not the crystal-clear, pristine name everyone would like to see, but it's a jumbo deal that shouldn't see any problem getting done," said a convertible trader at a hedge fund in Connecticut.

"The terms look pretty good and hopefully we get [2003] off on better footing."

Most of the terms were circulating late Monday, although a few details remained sketchy. Pricing of the Rule 144A deal is set after the close Wednesday.

Series A is a 15-year senior note talked at a yield of 3.0% to 3.5% with a 28%-32% initial conversion premium. It will be non-callable for three years with puts in years five and 10.

Series B is 20-year senior note talked at a yield of 3.125% to 3.625% with a 22% to 26% initial conversion premium. It will be non-callable for five years with a put in year 12.

"We are still modeling it out, but it looks decent," said Ravi Malik, a portfolio manager at Froley Revy.

Deutsche Bank Securities Inc. analysts put the 15-year tranche, which is more bond-like with the larger premium, at 5.35% cheap using a credit spread of 375 basis points over Libor and 40% volatility in the stock.

The analysts put the 20-year tranche at 3.9% cheap using a spread of 400 basis points over Libor and 40% volatility.

Deutsche analysts noted Tyco's 6.125% bond 2008 traded at 93 bid, 95 asked before this transaction was announced, or about 400-350 basis points over Libor.

While the credit will move a bit better on the news, the analysts said, the credit default swap and asset swap markets for Tyco will suffer from supply/demand imbalance.

There are still some gaps in information on the deal.

The amounts to be issued in each tranche were yet to be determined, according to a banker working on the deal, which will be a matter of demand.

There also was still some uncertainty about lead managers.

A buyside source said documents on the deal stated Morgan Stanley, Goldman Sachs & Co. and Salamon Smith Barney were joint lead managers. But a source at one of those banks said the front page line-up could wind up differently.

Banc of America Securities has been widely thought to end up as a joint led manager.

Tyco also announced late Monday that it has obtained commitment letters from various banks for a new $1.5 billion credit facility. Bank of America and Morgan Stanley are the lead banks on the facility, market sources previously told Prospect News.

Some market sources also expected a full roadshow for the convertible, but there is only a conference call scheduled at 10:30 a.m. ET Tuesday.

"The [convertible] market is very hungry for equity-sensitive paper and this is an improving credit rather than declining," said Deutsche convertible analyst Jonathan Cohen, before the Tyco deal was officially launched.

"It seems quite logical that there would have to be a roadshow," he said, noting changes in Tyco management as well as the makeup of the company after the CIT Group spin-off and the plastics unit was not sold.

Tyco announced a week ago, just before year-end, that an internal investigation found no fraud, but uncovered $382 million in accounting errors and adjustments that will be represented as pre-tax charges in fiscal 2002.

While Tyco said the errors did not represent significant or systemic fraud, the conglomerate admitted previous management used "aggressive bookkeeping" to boost results.

The new convertible is a linchpin in Tyco's plans for the new bank line, which will replace its existing facility that expires in February.

Tyco said commitments for the new bank line are subject to various conditions, including the absence of any credit downgrade and successful completion of the convertible.

Tyco reaffirmed its previously announced guidance for fiscal first quarter 2003, with EPS from continuing operations in a range of 30-33c and free cash flow at zero to $300 million.

Tyco said in a statement that in order to alleviate concerns that senior unsecured debt at its various holding companies would be structurally subordinate to claims by direct creditors of Tyco's operating subsidiaries, Tyco has agreed that its material operating subsidiaries will guarantee their pro rata share of finance subsidiary inter-company debt to Tyco International Group S.A., a wholly owned subsidiary of Tyco, and Tyco International Group will guarantee Tyco's outstanding 0% convertibles due 2020.

Tyco International Group will issue the new convertible.

Tyco expects the guarantees to be in place shortly.

Standard & Poor's assigned a BBB- rating to Tyco's new convertible, noting the ratings were placed on negative watch along with Tyco's existing ratings. Once the financing is executed, S&P said it expects to remove all watch conditions and affirm Tyco's ratings with a stable outlook, subject to completion of the bank facility and the new guarantess.

Tyco faces up to $11.3 billion of debt coming due in 2003, with nearly $6 billion of that total due in February.

Tyco CEO Edward Breen said on a conference call last week that the company planned to refinance about half of the $3.8 billion outstanding under its current bank credit facility.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.