Fitch Places Tyco Intl's Ratings on Negative Watch after Merger Agreement with Johnson Controls
The merged company will maintain Tyco's Irish domicile and be named Johnson Controls plc, with 44% of shares owned by existing Tyco shareholders. It will exclude JCI's automotive business, Adient, which JCI plans to spin off shortly after completing the merger with Tyco. Tyco has obtained a committed $4 billion bank facility which will be used to fund $3.9 billion of cash to be paid to JCI shareholders as part of the merger. Fitch expects Tyco's existing notes will remain outstanding after the merger is completed, as a change of control triggering event would require both a change of control and a decline in the ratings, as defined in the indentures, to below investment grade.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The Negative Watch incorporates Fitch's expectation that leverage and other credit metrics at the merged company will be roughly similar to Tyco's existing credit metrics, which in Fitch's view are weak for the company's 'A-' rating. At Sept. 25, 2015, total adjusted debt/EBITDAR at Tyco was 3x (2.6x when adjusted to exclude Fitch's estimate of net debt repaid in October 2015). This is higher than the 2x level that represents Fitch's expected mid-point for Tyco through the business cycle. An improvement in metrics originally expected by Fitch for Tyco on a standalone basis could be delayed, or could even temporarily deteriorate when considering the merged company.
Fitch believes a downgrade of Tyco's ratings would be limited to one notch although a two-notch downgrade is possible if credit metrics are initially weaker than Tyco's current metrics and fail to improve. Tyco's ratings could be affirmed if total adjusted debt/EBITDA appears likely to decline below 2x shortly after the merger or if free cash flow (FCF)/total adjusted debt returns to levels near 15% or higher compared to slightly below 10% in 2016 as estimated by Fitch.
In addition to existing debt at Tyco, pro forma debt will include $3.9 billion of new debt to be issued to help fund the payment to JCI shareholders and a portion of debt at JCI that will be moved with JCI's building and power business into the merged company. Fitch estimates total debt at the merged company will total approximately $11 billion compared to Fitch's estimate of existing debt at Tyco of $2.4 billion when excluding debt that was repaid in October 2015.
Other considerations that could pressure credit metrics in the near term include FCF at both Tyco and JCI, which was weak in 2015, and initial costs to realize long-term annual operating and tax synergies. JCI estimates savings from cost synergies will total at least $650 million. Recent FCF at Tyco and JCI included one-time items such as asbestos payments at Tyco and transaction costs at JCI. FCF should improve in 2016 but Fitch estimates FCF/total adjusted debt on a pro forma basis for the merged company could remain below 10%.
Fitch expects to resolve the Negative Watch prior to completion of the merger after it has an opportunity to review details about the merged company's operating strategy, capital structure, integration plans, and future FCF and leverage. After Tyco and JCI complete the merger and begin to integrate their respective businesses and generate synergies, credit metrics could begin to improve, although the pace of a return to stronger metrics is presently unclear.
Benefits from the combination of Tyco and JCI include cost and sales synergies, an expanded product and service portfolio, and capabilities to provide and integrate data and connected systems. JCI estimates services for the combined company will be approximately 30% of revenue, helping to offset the impact of cyclicality in the company's end markets. JCI's Building Efficiency business complements Tyco's fire and security systems and products businesses, as they serve similar markets but do not necessarily overlap. JCI's Power Solutions business is distinct from Tyco's business lines but has a strong share of the global market for automotive batteries and favorable margins (17% in 2015).
At Tyco, restructuring actions should decline in 2016 and asbestos payments will be materially lower following approximately $600 million of payments in 2015 to resolve a large portion of Tyco's asbestos liabilities. Previous concerns about tax litigation were significantly reduced following a preliminary accord reached with the IRS recently to settle outstanding disputes related to the 1997-2000 period for which the IRS claimed that Tyco owed income taxes of approximately $1 billion (not including interest or possible related claims for subsequent periods).
A final resolution is contingent upon the IRS's application of the agreement to the 2001-2007 period and, if applicable, a review by the U.S. Congress Joint Committee on Taxation. The settlement would involve a cash payment to the IRS of $475 million - $525 million to be shared among Tyco and former affiliates under a sharing agreement. Fitch estimates Tyco's share would not exceed approximately $140 million.
KEY ASSUMPTIONS
Fitch's key assumptions for Tyco on a standalone basis before the merger with JCI include:
--The negative impact on sales and earnings from currency movements is expected to continue into fiscal 2016, offsetting much of Tyco's organic growth;
--Tyco's adjusted operating margins, excluding special charges, improve modestly in 2016 due to restructuring;
--Fitch expects Tyco's FCF will be approximately $400 million in 2016, lower than the $500 million previously expected, partly due to ongoing pressures in Tyco's end markets, but well above FCF in 2015 of negative $31 million;
--Adjusted debt/EBITDAR declines toward 2x during the next two years;
--Future annual asbestos payments will be relatively low beginning in 2016 following approximately $600 million of payments in 2015 to resolve a large portion of Tyco's asbestos liabilities;
--The contingent agreement with the IRS is completed successfully.
RATING SENSITIVITIES
If the merger between Tyco and JCI is completed as expected, metrics for the combined company could be near to, or slightly weaker, than currently measured for Tyco on a standalone basis. The ratings could be downgraded by at least one notch if:
--Total adjusted debt/EBITDAR does not decline toward 2x during the two years following completion of the merger, compared to 2.6x for Tyco (adjusted for debt repayment in October 2015) at the end of fiscal 2015;
--FFO-adjusted leverage does not decline below 3x compared to nearly 4.7x at Sept. 25, 2015 which includes the effect of special charges;
--FCF/total adjusted debt is consistently below 10%;
--An adverse outcome on income tax litigation impairs Tyco's liquidity or leads to an increase in debt and leverage.
Fitch does not anticipate positive rating action in the near term.
LIQUIDITY
Tyco's liquidity at Sept. 25, 2015 included $1.4 billion of cash and a $1.5 billion bank credit facility that matures in 2020. The bank facility backs commercial paper issued under a $1.5 billion program. Tyco also has substantial leases, which Fitch considers in adjusted debt leverage metrics.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Watch Negative:
Tyco International plc
--Long-term IDR 'A-';
--Short-term IDR 'F2'.
Tyco International Finance S.A.
--Long-term IDR 'A-';
--Senior unsecured revolving credit facilities 'A-';
--Senior unsecured notes 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Комментарии