Credit analyst remains skeptical of Tyco credit quality, operating abilities

By Ronda Fears

Nashville, Jan. 23 - Tyco International Ltd. made strides in closing its funding gap with the new convertible earlier this month, but Gimme Credit director of research Carol Levenson still sees it as a speculative credit and advises avoiding it due to ongoing concerns about its cash drain and lingering operational problems.

"Despite its success in surmounting its liquidity problems and tapping the capital markets, this was not a quarter likely to convert us into Tyco believers," Levenson said in a report Thursday.

"We view Tyco as a speculative grade credit, and we would continue to avoid this name."

The new regime at Tyco (Ba3/BBB-) was blunt in its conference call, she said, when they referred to the working capital performance in fiscal first quarter as "atrocious."

Unfortunately, she added, they didn't provide a great deal more insight into what caused the $500 million cash drain from working capital items.

"To the great relief of bondholders everywhere, Tyco pulled off an impressive financing feat earlier this month by issuing $4.5 billion in convertible bonds just in time to pay off its maturing bank loan," she said.

"We still eagerly await the finalization and terms of its new $1.5 billion revolver, generously provided by its investment bankers - this was referred to as merely a 'commitment' in yesterday's conference call."

Some $11.2 billion in short-term debt appears on Tyco's newly-published December balance sheet, she noted, adding that after the end of the quarter Tyco paid off its maturing $3.855 billion bank loan with the proceeds from the convertible offering and has announced it will pay cash on the upcoming put of its 0% convertible due 2021.

Assuming Tyco borrows the full amount under its new revolver, the analyst said it could end the current quarter with net debt virtually unchanged before acquisitions. More important, short-term debt will be cut in half and unrestricted cash on hand should exceed short-term debt by over $1 billion, she said.

But Tyco's liquidity comfort level is dependent on meeting its free cash flow targets and maintaining access to bank lines, she added.

She estimates adjusted EBITDA fell by more than 30% in the quarter, due in part to disappointing results in the fire protection and security group. With interest expense up 40%, this produced debt/annualized EBITDA of a weak 4x, with EBITDA coverage cut in half to 6x, she added.

"While free cash flow was a respectable $400 million, it benefited from several items that can't be counted on for an assist every quarter," Levenson said.

"Obviously without these items [like cash from deferred taxes] free cash flow might well have been negative."

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