Credit analysts see Tyco's balance sheet overextended despite new convertible

By Ronda Fears

Nashville, Jan. 23 - Tyco International Ltd. has yet to show significant progress toward debt reduction although the company demonstrated ready access to the capital markets with its new convertible earlier this month, noted CreditSights analysts Glenn Reynolds and Patricia Lee.

"The negatives we see going forward for TYC are still dealing with an overextended balance sheet in a cyclically weak earnings environment," the analysts said in a report Thursday.

"The good news remains that financial flexibility has been significantly improved and the company has clearly demonstrated its ability to access the capital markets, but TYC has yet to make any significant progress on debt reduction."

While Tyco (Ba2/BBB-) repaid the $3.755 billion outstanding on its previous bank line and will be paying the February put on its $1.9 billion 0% convertible due 2021 in cash, the analysts noted that it came from the $4.5 billion of convertible debt.

Tyco s fiscal first quarter results were "underwhelming but not disturbing."

Still, the analysts said: "They do not tell a story of an improvement in financial profile that will take them back to full investment grade. The signal that was sent on financial flexibility has been a good one, but these types of numbers require asset sales or equity to restore financials. Nonetheless, it is moving in the right direction."

Against this backdrop, the analysts said it was reasonable that Tyco would also expect ratings upgrades will likely only follow a few more quarters of realigning the capital structure as well as operational execution.

"That was a balanced statement on its current credit condition, and anything else would have been wishful thinking," they said.

"The good news is that they can get there if they get off a few major asset sales and see some earnings recovery. They certainly could have access to the market again as well."

There are concerns and operating trends, the analysts noted, and the outlook remains guarded with more optimism for the second half of 2003.

"As a result, we do not expect a well of enthusiasm for TYC's credit trend to spring up, but it is also clear that the panic is behind the company" the analysts said.

"Despite margin pressure in certain segments (such as Fire & Security) and slightly lower 2Q earnings guidance, the numbers still at least underscored the company's solid asset base, even if it currently is an asset base with subpar results."

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