A sell-side analyst argues that Tyco International's bonds are cheap after the company revealed more accounting problems in its second quarter earnings release last Wednesday, but an independent credit analyst continues to see downside risks.
Bids on Tyco's benchmark 10-year issue, the 6.75% notes of '11, were down two points to 98 last Wednesday morning, after a Wall Street Journal article indicated the company would make fresh accounting disclosures. By Thursday morning, however, the bonds were bid at 100.25--slightly higher than where they had been before the accounting problems were revealed
Bill Reed, analyst at Deutsche Bank, sees at least six points of upside in the credit. He notes that the company has indicated that free cash flow for the year will be at the high end of the range it had projected earlier in the year. He is also encouraged by Tyco's continued progress in paying down debt. Reed is not disturbed by what others might perceive as the company's slowness to come clean. "Tyco has been deliberate in dealing with this accounting issue for two reasons. First, accounting standards and interpretations are becoming more conservative at a variety of levels. Second, it's my belief that Tyco's management to best of its ability is trying to anticipate how the [Securities and Exchange Commission] will interpret Tyco's new accounting policies."
But, the ongoing SEC investigation into the company's accounting practices still gives cause for concern, says Carol Levenson, director of research at Gimme Credit. She also argues that weaker business conditions are facing many of Tyco's units, and cash flow numbers are still unpredictable. With these factors added to the continued accounting disclosures, she remains a bear on the credit. "I wouldn't find these bonds intriguing unless they were at least 100 basis points cheaper and the SEC investigation was concluded," she says.