Fitch Affirms Tyco Electronics' 'BBB' IDR & 'F2' CP Rating; Outlook ...

Tag : electronics
Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR)for Tyco Electronics Ltd. (NYSE:TEL) and its wholly ownedsubsidiary, Tyco Electronics Group S.A. (TEGSA). The followingTEGSA 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 ratingsaffects approximately $3.2 billion of total debt.

The ratings and Stable Outlook reflect the consolidated company's(together, Tyco Electronics): conservative capital structure andsolid liquidity with consistent annual free cash flow (FCF) inexcess of $500 million; industry-leading positions in large andrelatively fragmented markets; manageable operating volatility dueto the company's relatively diversified product, customer andend-market portfolios (no customer represents more than 10% of TycoElectronics' net sales); balanced geographic manufacturingfootprint with substantial scale and scope that should result inongoing market share gains in more rapidly growing developingmarkets; and positive longer-term industry demand drivers.

Ratings concerns center on:

--Fitch's belief that Tyco Electronics' ability to return operatingprofitability to historically higher levels (implying double-digitprofitability growth over the next three years) will be constrainedby ongoing reductions in average selling prices (ASP) across themajority of its end markets, despite recent divestitures ofless-profitable businesses and anticipated cost reductions fromrestructuring activities;

--The cyclical demand patterns associated with electronicscomponents;

--The company's financial policies and use of free cash flow beyondthe near term.

Fitch believes that consistent operating performance, particularlywithin the context of the currently less-favorable operatingenvironment in the United States and Western Europe, and thecontinued disciplined use of free cash flow, could result inpositive rating actions. Alternatively, share repurchases andacquisitions in excess of annual FCF, indicating a shift infinancial policies, and meaningful operating margin erosion, couldresult in negative rating actions.

Despite Fitch's expectations that the aforementioned ongoingpricing pressures will constrain meaningful intermediate termprofitability expansion, Tyco Electronics' operating margins haveincreased versus the prior-year period in each of the last threequarters, driven by the company's ongoing restructuring anddivestitures of lower-margin businesses, including the expecteddivestitures of the company's Automotive Radar Sensors and RadioFrequency Components and Subsystems businesses at the end ofcalendar year 2008. The company continues to simplify its globalmanufacturing footprint, including the announced planned closure ofthree automotive manufacturing facilities in Western Europe, whichshould result in Tyco Electronics incurring $200 million of cashrestructuring costs in 2008 and $330 million in 2009-2010. Theratings incorporate the potential for modest operating marginerosion and, assuming debt levels remain $3 billion to $3.5billion, Fitch expects operating EBITDA-to-gross interest expensewill remain in excess of 10 times (x), and total debt-to-operatingEBITDA below 2.5x

Given the company's relatively modest capital spending and researchand development investment requirements, which combined representonly approximately 7.5% of revenues, Fitch expects annual free cashflow for Tyco Electronics should be $500 million to $1 billion. Thecompany's solid liquidity position and relatively modest operatingcash needs provide the company with adequate financial flexibilityfor a combination of share repurchases and acquisitions. As of June27, 2008, the company had approximately $1.1 billion remainingunder its current $2 billion share-repurchase authorization. Fitchexpects 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 orincrease penetration in underserved markets.

Fitch believes Tyco Electronics' liquidity is solid and supportedby:

--Approximately $730 million of cash and cash equivalents as ofJune 27, 2008;

--A $1.5 billion, five-year revolving credit facility expiringApril 2012. The company's revolving credit facility backs-up thecompany's up to $1.25 billion CP program ($662 million wasoutstanding as of June 27, 2008).

--Further supporting liquidity is Fitch's expectation for annualfree cash flow in the range of $500 million-$1 billion.

Total debt as of March 28, 2008, pro forma for the recent $300million senior notes and $100 million of profit sharing notesissuance, 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.

Fitch's rating definitions and the terms of use of such ratings areavailable on the agency's public site, www.fitchratings.com.Published ratings, criteria and methodologies are available fromthis site, at all times. Fitch's code of conduct, confidentiality,conflicts of interest, affiliate firewall, compliance and otherrelevant policies and procedures are also available from the 'Codeof Conduct' section of this site.