Tyco International Group's turnaround in the last year is being recognized in the bank markets with a new $2.5 billion deal that knocks off nearly 200 basis points on pricing and offers improved covenants. Bank of Americaand Citibankare leading the debt refinancing, which comprises a three-year, $1.5 billion revolver and $1 billion, 364-day revolver. "The less restrictive covenants reflect the fact that our financial position is a lot stronger now ,"said John Roselli, senior manager of investor relations for Tyco. "We've paid down a lot of debt and we're now in a position to negotiate a better facility. We have no liquidity issues now and are generating very good cash flow."
Roselli noted that the situation was much different a year ago. "At the time of the [previous] facility, we were downgraded to junk by Moody's[ Investors Service] and that triggered covenants and higher interest rates," he said. When the last facility was negotiated in January 2003, Tyco faced a number of challenges. It had new management, a new board of directors and it faced $11 billion of debt maturities, according to George Meyers, v.p. senior credit officer with Moody's. "If you think about where the company was when they did the transaction last year--they were considered on the edge with a significant amount of debt maturities to cover," a top-tier lender on the credit said.
Undrawn pricing on the new deal is said to be 20 basis points on the one-year facility and 25 basis points on the three-year portion. Fully drawn, both tranches pay LIBOR plus 1 3Ž 8%. Pricing on the previous facility was 50 basis points undrawn and LIBOR plus 3 1Ž 4% fully drawn. The facility is not expected to be guaranteed by Tyco's subsidiaries, as the previous one was and material adverse change language is expected only at closing. The credit facility was expected to close late last week.
Reportedly, there are over 30 banks participating in the line. "There are plenty of interested parties," Roselli said. "The risks are much lower at this point."
The market has recognized that the company has successfully addressed liquidity issues, the lender said. Tyco's credit default swap spread is trading at LIBOR plus 1%, having come from LIBOR plus 4 1Ž 2-5%, he stated. "The company has all the reason to ask for and receive a more investment-grade covenant package," he added. Calls to B of A and Citi bankers were not returned.