CHICAGO /BUSINESS WIRE/ -- Fitch Ratings has affirmed the BBB issuer default rating (IDR) for Tyco Electronics Ltd. and its wholly owned subsidiary, Tyco Electronics Group S.A. (TEGSA). The following TEGSA ratings also are affirmed:
- Short-term IDR and commercial paper (CP) program at F2;
- Senior unsecured revolving credit facility at BBB;
- Senior unsecured notes at BBB.
The rating outlook is stable. The affirmation of the ratings affects approximately $3.2 billion of total debt.
The ratings and stable outlook reflect the consolidated company's (together, Tyco Electronics): conservative capital structure and solid liquidity, with consistent annual free cash flow (FCF) in excess of $500 million; industry-leading positions in large and relatively fragmented markets; manageable operating volatility due to the company's 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 that should result in ongoing market share gains in more rapidly growing developing markets; and positive longer term industry demand drivers.
Ratings concerns center on:
- Fitch's belief that Tyco Electronics' ability to return operating profitability to historically higher levels (implying double-digit profitability growth over the next three years) will be constrained by ongoing reductions in average selling prices across the majority of its end markets, despite recent divestitures of less-profitable businesses and anticipated cost reductions from restructuring activities;
- The cyclical demand patterns associated with electronics components;
- The company's financial policies and use of free cash flow beyond the near term.
Fitch believes that consistent operating performance, particularly within the context of the currently less-favorable operating environment in the U.S. and Western Europe, and the continued disciplined use of free cash flow, could result in positive rating actions. Alternatively, share repurchases and acquisitions in excess of annual FCF, indicating a shift in financial policies, and meaningful operating margin erosion, could result in negative rating actions.
Despite Fitch's expectations that the aforementioned ongoing pricing pressures will constrain meaningful intermediate-term profitability expansion, Tyco Electronics' operating margins have increased versus the prior-year period in each of the last three quarters, driven by the company's ongoing restructuring and divestitures of lower-margin businesses, including the expected divestitures of the company's automotive radar sensors and radio frequency components and subsystems businesses at the end of calendar year 2008. The company continues to simplify its global manufacturing footprint, including the announced planned closure of three automotive manufacturing facilities in Western Europe, which should result in Tyco Electronics incurring $200 million of cash restructuring costs in 2008 and $330 million in 2009-2010. The ratings incorporate the potential for modest operating margin erosion and, assuming debt levels remain $3 billion to $3.5 billion, Fitch expects operating EBITDA-to-gross interest expense will remain in excess of 10 times, and total debt-to-operating EBITDA below 2.5 times
Given the company's relatively modest capital spending and research and development investment requirements, which combined represent only approximately 7.5% of revenues, Fitch expects annual free cash flow for Tyco Electronics should be $500 million to $1 billion. The company's solid liquidity position and relatively modest operating cash needs provide the company with adequate financial flexibility for a combination of share repurchases and acquisitions. As of June 27, the company had approximately $1.1 billion remaining under its current $2 billion share-repurchase authorization. Fitch expects the company will increase its acquisition activity, although targets are likely to be smaller intellectual property (IP)-driven or opportunities to engage with new customers or increase penetration in underserved markets.
Fitch believes Tyco Electronics' liquidity is solid and supported by:
- Approximately $730 million of cash and cash equivalents as of June 27;
- A $1.5 billion, five-year revolving credit facility expiring April 2012. The company's revolving credit facility backs-up the company's up to $1.25 billion CP program ($662 million was outstanding as of June 27).
- Further supporting liquidity is Fitch's expectation for annual free cash flow in the range of $500 million-$1 billion.
Total debt as of March 28, pro forma for the recent $300 million senior notes and $100 million of profit sharing notes issuance, consists of:
- Approximately $800 million of 6% senior notes due Oct. 1, 2012;
- Approximately $748 million of 6.55% senior notes due Oct. 1, 2017;
- Approximately $498 million of 7.125% senior notes due Oct. 1, 2037;
- $300 million of 5.95% senior notes due 2014;
- $662 million of borrowings outstanding under the CP program;
- Other debt of approximately $184 million.