Tyco Keeps Improving; KinderCare Issues IDS

Tyco International Group has improved its financial performance and reduced debt after making strong headway during 2003. Last December, Tyco refinanced its $2.5 billion bank lines knocking 200 basis points off pricing after transforming its risk profile (LMW, 12/22). Moody's Investors Service is now considering upgrading the Ba2 ratings on the bank lines, which are led by Bank of America and Citibank.

Moody's will look at Tyco's ability to improve profitability through additional cost cutting measures, restructuring actions, sale of underperforming businesses and the potential improvement in economic conditions. But there are concerns, including ongoing litigation risk stemming from the Securities and Exchange Commission and New York District Attorney, as well as other suits. There is the potential impact of an adverse decision on the company's liquidity and financial condition, the rating agency adds. A Tyco spokesman declined comment on the lawsuits.

* Pre-school education and child-care services provider KinderCare Learning Center has registered to offer income deposit securities (IDS) and new senior subordinated notes. The proceeds will refinance existing debt and pay a dividend to Kohlberg Kravis Roberts & Co. Standard & Poor's has placed the credit on watch with negative implications as KinderCare could have significantly more debt after the transaction. The review includes the company's B+ senior secured rating and its B- subordinated debt rating. A KinderCare spokeswoman declined comment.

IDS are a new hybrid equity and debt structure that is being used by private equity firms to gain liquidity from their investments. American Seafoods Group, Coinmach Corp. and United Agri Products have all been placed on credit watch with negative implications by S&P for planning to issue these securities (4/17). IDS contain a share of common stock and a subordinated note clipped together as one unit that trades on a stock exchange. Owners of the unit receive dividends and interest payments that result in a yield, typically in excess of 10%. S&P has described the structure as exhibiting an aggressive financial policy. In addition to anxieties over the IDS structure, S&P remains concerned about the declining occupancy rates at KinderCare's child-care centers.