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Fitch Affirms Tyco Electronics at 'BBB/F2'; Revises Outlook to Positive from Stable

^{Published on 2010-06-11 12:55:34 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for Tyco Electronics Ltd. (NYSE: TEL) and its wholly owned subsidiary, Tyco Electronics Group S.A. (TEGSA):

Tyco Electronics Ltd.

--Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR at 'F2';

Tyco Electronics Group S.A. (TEGSA)

--IDR at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper (CP) program at 'F2';

--Senior unsecured revolving credit facility (RCF) at 'BBB';

--Senior unsecured notes at 'BBB'.

Fitch also has revised the Rating Outlook to Positive from Stable. Fitch's actions affect approximately $2.4 billion of total debt ($3.8 billion including the undrawn RCF).

The Positive Outlook reflects:

Fitch's increased confidence that Tyco Electronics' operating performance will exceed original expectations in fiscal 2010, as well as the company's ability to maintain operating margins in the mid teens through the intermediate-term. Strong new order growth and the resultant higher utilization rates, in conjunction with lower fixed costs from restructuring over the past year, drove Tyco Electronics' operating margins to a Fitch estimated 14.4% in the quarter ended March 26, 2010, and expectations for solid organic revenue growth in the second half of fiscal 2010 should enable the company to exit fiscal 2010 with operating margins exceeding 12% versus 10.6% for the for the latest 12 months (LTM) ended March 26, 2010.

As a result of improving profitability and modest additional debt reduction of approximately $100 million of short-term debt, Fitch believes Tyco Electronics' credit protection measures will strengthen meaningfully in fiscal 2010. Fitch estimates total leverage will be below 1.5 times (x) with interest coverage in excess of 13x, meaningfully stronger than the estimated 2x and 7.5x, respectively, in fiscal 2009. Going forward Fitch believes the company will maintain total leverage at or below 2x through a normalized business cycle. While the potential for a short-term uptick in total leverage to the 2x to 2.5x range as a result of more acute downturns or debt-financed acquisitions exists, the ratings incorporate Fitch's expectations that Tyco Electronics would use subsequent free cash flow to reduce debt and bring total leverage back below 2x over the subsequent short-term.

The revised Outlook also reflects Fitch's expectations for higher annual free cash flow of $500 million to $1 billion, up from Fitch's previous forecast of $250 million to $750 million. The company generated more than $500 million in the first half of fiscal 2010 and should approximate $750 million for the full fiscal year, after approximately $275 million of cash restructuring payments and pension contributions. This follows Tyco Electronics' more than $700 million of free cash flow in fiscal 2009, primarily from the liquidation of working capital as revenues declined nearly 29%. Fitch expects annual free cash flow in fiscal 2010 will be primarily driven by the aforementioned higher profitability, as the company should use cash from working capital associated given double digit near-term revenue growth expectations. Given historically high cash balances and expectations for higher cash generation, Fitch anticipates Tyco Electronics will resume share repurchases that could approximate annual free cash flow (potentially $1 billion annually) over each of the next few years. Nonetheless, Fitch anticipates Tyco Electronics would curtail share repurchases were free cash flow to be pressured.

Tyco Electronics' revenue growth of 11% for the first half of fiscal 2010 has been broad based and exceeded Fitch's expectations, particularly the sharpness of the rebound in automotive production. Revenue growth is expected to remain solid for the remainder of fiscal 2010, driven by strong book-to-bill ratios across all businesses exiting fiscal second quarter (except Subseas Telecommunications), robust unit growth in China and benign average selling price declines overall. Nonetheless, Fitch believes longer term organic revenue growth prospects remain in the low to mid single digits, particularly given that inventory restocking and the benefit of government stimulus programs will have been substantially completed. Certain growth markets, including Tyco Electronics' exposure to automation within energy markets, medical devices, touch systems, and defense and aerospace, provide potential for modestly higher revenue growth rates over the longer-term.

The ratings continue to reflect the company's:

--Conservative financial policies, including adequate liquidity with consistent annual free cash flow;

--Industry-leading positions in large and relatively fragmented markets;

--Relatively diversified product, customer and end-market portfolios (no customer represents more than 10% of Tyco Electronics' net sales);

--Balanced geographic manufacturing footprint with substantial scale and scope, which should result in longer-term share gains in more faster growing developing markets.

Ratings concerns center on:

--The cyclical demand patterns associated with electronics components;

--The company's ability to mitigate ongoing average selling price (ASP) pressures in the majority of its end markets with efficiency initiatives and new product introductions beyond the near-term;

--The company's use of cash for share repurchases and acquisitions, given mature organic revenue growth prospects across certain key end markets.

As of March 26, 2010, Fitch believes Tyco Electronics' liquidity was adequate and supported by:

--Approximately $1.8 billion of cash and cash equivalents, the majority of which Fitch believes is generated and located outside the United States. Nonetheless, Fitch does not believe cash location is an issue for Tyco accessing its cash, given the company's Switzerland incorporation;

--An undrawn $1.4 billion, five-year revolving credit facility expiring April 2012. This credit facility backs up the company's up to $1.25 billion CP program.

Further supporting liquidity is Fitch's expectation for annual free cash flow of $500 million to $1 billion through the business cycle. While legacy litigation issues essentially have been settled, the company anticipates paying its share of historical tax liabilities, upwards of $700 million, over several years. Contributions to the company's pension plans over the next several years are accommodated at existing ratings.

As of March, 26, 2010, total debt was approximately $2.4 billion and consisted of:

--Approximately $720 million of 6% senior notes due Oct. 1, 2012;

--Approximately $300 million of 5.95% senior notes due Oct. 1, 2014;

--Approximately $742 million of 6.55% senior notes due Oct. 1, 2017;

--Approximately $475 million of 7.125% senior notes due Oct. 1, 2037;

--Other debt of approximately $177 million.

Additional information is available at '[ www.fitchratings.com ]'.

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