Tyco Stock, Bonds Plunge on Rating Downgrades
Tyco International Ltd. stock and bonds were pummeled Tuesday amid growing concerns about its ability to raise cash after its credit ratings were slashed Monday.
The stock lost as much as a quarter of its market value in early trading on the New York Stock Exchange and, despite a mild recovery later, saw its market value shrink by more than $13billion to about $46 billion.
Tyco announced after the markets closed that its financial unit would draw from $8.5 billion in bank credits to pay off short-term debt, a day after Tyco said it would tap $5.9 billion in credit lines to pay off $4.5 billion in debt. The new move prompted Fitch Investors to cut its rating on Tyco Capital’s senior and subordinated debt and to lower its commercial paper to F2 from F1.
The parent company’s debt ratings were cut Monday by Standard & Poor’s and by Fitch.
In total, the conglomerate has lost about $70 billion, or more than half of its market value, since the beginning of the year and is trading at its lowest level since October 1998.
The stock closed off $6.80, or 23%, at $23.10 in heavy trading on the New York Stock Exchange but off its intraday low of $22.50. The shares closed at $58.90 on Dec.31.
Tyco’s 6.38% notes due in 2011 fell 5 cents to 75 cents on the dollar Tuesday. Yield on the debt climbed 1 percentage point to 10.2%.
Though Tyco’s bonds remain investment grade, bond investors are treating them like junk, quoting the bonds by price rather than by their yield margin over U.S. Treasuries.
But analysts say that no end seems in sight for the rapid decline of Tyco’s shares or bonds.
“There’s no reason to believe this name has bottomed out,” said Carol Levenson, a bond analyst at Gimme Credit, who raised questions in a Tuesday research note about how the company would refinance an estimated $11 billion in maturities coming due over the next 18 months.
Concerns about Tyco’s accounting practices have damaged investor confidence after the fallout from the collapse of energy trader Enron Corp.
In the wake of the Enron scandal, Tyco has been haunted by rumors, questions about its accounting and corporate ethics, and skepticism over its plan to split into four parts. Some earlier rumors that hurt the stock eventually proved to be untrue.
But analysts say the company’s current credit trouble represents a real problem and the stock is likely to continue to drop until details surface about their new financing.
“Whether [Tyco’s] life as a short seller’s clay pigeon has been the driver or whether the company’s own inability to make the case clearly enough has been the culprit, [Tyco] now is in a major league quandary,” wrote Glenn Reynolds, a bond analyst at CreditSights, in a research note.
Reynolds said Tyco’s tapping into credit lines and its inability to issue commercial paper demand an entirely new capital structure for the company.
