S&P Downgrades Tyco International (TYC) to 'BBB+'; Outlook is Stable

August 25, 2016 3:54 PM EDT

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S&P Global Ratings said that it has lowered its corporate credit rating on Tyco International PLC (NYSE: TYC) to 'BBB+' from 'A-' and removed the rating from CreditWatch, where we placed it with negative implications on Jan. 25, 2016. The outlook is stable

At the same time, we affirmed our 'BBB+' corporate credit rating on Johnson Controls Inc. (JCI; which will become a core subsidiary of Tyco) and removed the rating from CreditWatch, where we placed it with positive implications on Jan. 26, 2016. Under the terms of the proposed transaction, Tyco will serve as the ultimate parent and reporting entity. The outlook is stable.

In addition, we assigned our 'BBB+' corporate credit rating and 'A-2' short-term rating to Tyco's subsidiary Tyco International Holding S.a.r.l (TSARL). The outlook is stable. We also assigned our 'BBB+' issue-level rating to TSARL's $4 billion senior unsecured term loan due 2019, which will be drawn upon following the completion of the merger.

Finally, we affirmed our 'BBB+' issue-level ratings on Tyco International Finance S.A. (TIFSA) and JCI's unsecured debt issues and removed the ratings from CreditWatch, where they were placed with developing implications on Jan. 25, 2016, and June 10, 2015, respectively. We expect that the company will exchange JCI's outstanding unsecured notes for TIFSA's unsecured notes. We also affirmed our 'A-2' short term ratings on Tyco, TIFSA, and Johnson Controls Inc.

"The downgrade of Tyco (which will be renamed Johnson Controls International PLC following the completion of its merger with JCI on Sept. 2, 2016) reflects the company's weakening pro forma credit ratios due to the increased debt required to fund the merger transaction, which will leave the company with an estimated adjusted debt-to-EBITDA metric of about 2.6x in 2017," said S&P Global credit analyst Liley Mehta. "We have revised our assessment of Tyco's financial risk profile to intermediate from modest because of its increased debt leverage."

The stable outlook reflects our expectation that the company's earnings will benefit from merger synergies and modest revenue growth and that its debt-to-EBITDA metric will remain in the 2x-3x range. While we do not expect there to be significant integration problems, there is always some risk with a transaction of this size.

We could lower our ratings on the company over the next 24 months if we expect that its net adjusted debt-to-EBITDA will increase above 3x for a sustained period. This could occur if the company is unable to realize a significant portion of its expected cost synergies from the merger, reducing its earnings and cash flows. Although less likely, this could be caused by a decline in end market demand, or a decision by the company to make sizable acquisitions or share repurchases that increased its debt leverage beyond the appropriate range.

Over the next two years, we could raise our ratings on the company if it successfully integrates its operations, achieves its expected synergies, and improves its profitability, leading us to favorably reassess its business risk profile. We could also raise our ratings if its adjusted debt-to-EBITDA metric declines below 2x and we believe that the company is committed to maintaining its leverage at this level. This could be caused by a higher-than-expected level of earnings and cash flow due to increased merger synergies or elevated end market demand that enables the company to speed up its debt reduction and shift to a more conservative financial policy.



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