Moody's cuts Tyco convertibles to Ba3

Moody's downgraded both the long-and short-term debt ratings of Tyco International Group S.A. to Ba2 from Baa3 and Not Prime from Prime-3, respectively, as well as cut the two 0% convertible debentures to Ba3 from Ba1.

About $23 billion of the $27 billion of consolidated debt of Tyco International Ltd. and its subsidiaries is at the corporate parent level.

Tyco's ratings remain under review for possible further downgrade.

At the same time, Moody's affirmed CIT Group's ratings, but changed the outlook on its ratings to negative.

The rating actions reflect Moody's heightened concern about the potential implications for Tyco from widening investigations, both internally and externally, including the recent firing of Tyco's chief counsel.

The rating agency said that possible further management changes, emerging from adverse developments of corporate governance issues, could divert management focus from the core business and hinder the company's ability to restore confidence of its customers, suppliers and investors.

Moody's noted that Tyco is expected to proceed with the planned IPO of its CIT subsidiary, which should bring needed cash to begin debt reduction.

However, even with the anticipated debt reduction from the CIT transaction, the potential risks attendant to the widening array of management and corporate governance issues at Tyco render the company's credit profile inconsistent with an investment grade rating.

Also, Moody's noted that these rating actions trip contractual rating triggers that could require TIG to repurchase its ¥30 billion ($223 million) 3.5% notes due 2030 and to settle an interest rate hedge that would result in Tyco receiving approximately $160 million.

Tyco has received approval of the S-1 registration from the SEC with respect to the IPO of The CIT Group.

However, Tyco will have to amend its Form 10-Q for its second quarter ended March 31 to reflect goodwill impairment associated with the CIT transaction. Tyco will take a $4.8 billion non-cash charge reducing its $11.3 billion investment in CIT to $6.5 billion.

As a result, Tyco's debt to capital ratio will rise to approximately 49% on a pro forma basis, leaving modest headroom under its 52.5% debt to capital bank covenant prior to applying proceeds from the IPO to debt reduction.

In addition to the CIT transaction, Moody's ongoing review will consider any emerging issues related to the company's internal investigation as well as its progress in identifying new management leadership.

The review will incorporate any changes in the company's strategic direction and financial policies under the new management team and any actions implemented to enhance corporate governance practices.

Moody's will also will also focus on Tyco's liquidity and debt paydown plan going forward, paying particularly close attention to the company's ability to repay or refinance maturing debt over the next 12 to 18 months, as well as its ability to handle two convertible debt issues that have puts in 2003.

The rating agency said that the company's ability to access the capital markets and to restore normal banking relationships will be evaluated and notes that Tyco's term loan under its $3.855 billion 364-day revolver matures in February 2003.

Moody's will also assess the company's ability to restore profitability to historical levels, especially within the Electronics segment, as well as cash flow generation in a new operating environment where Tyco expects more modest 10-15% organic growth and diminished acquisition activity.

Although interim management has confirmed the new strategy and earnings expectation for the third quarter (ending June 30) and the full year (ending September 30), Moody's expects that achieving these financial results will be challenging.

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