Credit analyst: Tyco financing efforts likely best news for some time

By Ronda Fears

Nashville, Jan. 7 - Tyco International Ltd.'s convertible financing effort and new bank line are likely to be the best news for a while, according to Carol Levenson, director of research at Gimme Credit. She added that she still sees little room for any upside to the credit.

The financing effort from Tyco (Ba3/BBB-), the analyst points out in a report Tuesday, comes less than a month before its $3.6 billion bank loan falls due.

"In this case, it appears convertible bond investors are willing once again to become the lenders of last resort for a troubled company and to bolster its financial flexibility," Levenson said.

"Even if this rescue goes off as planned, as we pointed out [Monday], Tyco still has many obstacles to overcome on the road to improved credit quality."

In addition to the $3.25 billion two-part convertible debt, Tyco announced it had commitment letters from banks for a new $1.5 billion credit facility although no terms were disclosed.

"While this amount is modest, the new bank facility is an important symbolic milestone, demonstrating the company still can borrow from the banks despite the brinkmanship game it played with them last year," Levenson said.

"Bond investors must make the first move, however, as the bank facility is conditional upon a successful convertible private placement."

While both Standard & Poor's and Moody's Investors Service seem supportive of Tyco's efforts, the analyst pointed out that there remain considerable concerns at the troubled conglomerate.

Given this spirit of mutual cooperation, she said it appears likely both the convertible deal and the bank facility will come to pass. And through a combination of cash on hand, free cash flow, the new bank facility and the convertible should provide sufficient funds to meet cash needs this year.

"Although the end of Tyco's current liquidity crisis is in sight, amid the jubilation let's not forget that Tyco is depleting its cash and replacing debt with more debt," Levenson stressed.

"Even if the company meets its free cash flow expectations, we project only a modest decrease in net debt by the end of this year. With additional goodwill impairment charges likely, book leverage - over 50% adjusted for leases - will worsen."

As for cash flow, she noted that Tyco management's free cash flow guidance in a range from zero to $300 million for the quarter just ended implies visibility is not all that great.

Meanwhile EBITDA and cash flow have been steadily falling, resulting in weaker debt protection measures.

"We continue to believe the recent news is the best Tyco bond investors will be hearing for some time," Levenson said, "and we see little additional upside."

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