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Fitch Revises Tyco Electronics' Outlook to Negative; Affirms 'BBB/F2' IDRs

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^{Published in Stocks and Investing on Thursday, January 29th 2009 at 15:18 GMT, Last Modified on 2009-01-29 15:19:56 by Market Wire}  

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has revised the Rating Outlook to Negative for Tyco Electronics Ltd. (NYSE: TEL) and its wholly owned subsidiary, Tyco Electronics Group S.A. (TEGSA) while affirming the 'BBB' Issuer Default Rating (IDR) for both entities. In addition, the following TEGSA ratings are also affirmed:

--Short-term IDR and commercial paper (CP) program at 'F2';

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

--Senior unsecured notes at 'BBB'.

Fitch's action affects approximately $3 billion of total debt.

The Negative Outlook reflects the company's meaningfully weaker-than-expected financial results for the first fiscal quarter ended Dec. 26, 2008, including 18% and 31% year-to-year organic declines in total revenue and the automotive segment, respectively. Fitch believes the challenges for 2009 are significant, particularly for automotive end-markets in Europe and the United States, and demand visibility remains very limited. The company currently expects revenues for the second fiscal quarter ended March 30, 2009, to decline 32%-35% year-to-year. Fitch expects free cash flow (FCF) will be positive (in excess of $250 million for 2009) albeit lower than previously expected, due to pressured profitability and increased cash restructuring costs. Tyco Electronics continues to simplify its global manufacturing footprint, most recently announcing the planned closure of two additional manufacturing facilities in Western Europe and the U.S., which should result in Tyco Electronics incurring cash restructuring costs of $250 million in 2009. 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 stabilize the ratings.

The ratings continue to reflect the company's:

--Conservative capital structure and adequate liquidity with consistent but pressured annual FCF;

--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 that should result in longer-term market share gains in more rapidly growing developing markets.

Ratings concerns center on:

--Fitch's belief that Tyco Electronics' ability to return operating profitability to historically higher levels will be constrained by ongoing reductions in average selling prices (ASP) across the majority of its end-markets, despite ongoing 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 FCF beyond the near term.

The ratings currently incorporate the potential for EBITDA margin erosion to the 11%-13% range with debt remaining stable at $3 billion. Fitch estimates the resultant operating EBITDA-to-gross interest expense would decline to 8-10 times (x), while total debt-to-operating EBITDA would increase to 2.5x compared to the current 1.3x.

Fitch believes Tyco Electronics' liquidity is adequate and supported by:

--Approximately $545 million of cash and cash equivalents as of Dec. 26, 2008;

--A $1.5 billion, five-year revolving credit facility expiring April 2012, approximately $1 billion of which was available at Dec. 26 2008. This credit facility backs-up the company's up to $1.25 billion CP program.

--Further supporting liquidity is Fitch's expectation for free cash flow in excess of $250 million for 2009.

Total debt as of Dec. 26, 2008, consisted primarily of:

--Approximately $800 million of 6% senior notes due Oct. 1, 2012;

--Approximately $750 million of 6.55% senior notes due Oct. 1, 2017;

--Approximately $500 million of 7.125% senior notes due Oct. 1, 2037;

--$300 million of 5.95% senior notes due 2014;

--Approximately $190 million of borrowings outstanding under the company's $1.5 billion RCF due April 2010;

--Approximately $250 million of borrowings outstanding under the CP program; and

--Other debt of approximately $230 million.

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