Fixed-income analysts are divided on how investors should play the bonds of Tyco International following a review of the company's recently filed first quarter 10-Q report. An independent fixed-income analyst is reemphasizing her view that investors avoid the bonds. However, a sell-side analyst argues that, barring a dramatic worsening of the economy, Tyco bonds will trade on a spread basis before year-end. Tyco's benchmark 10-year issue, the 6.375% notes of '11, were bid at 92 last Wednesday. Trading on a spread basis--as opposed to dollar quotes--is usually taken as an indication that high-grade investors are once again actively involved in the credit.
Information in the 10-Q report demonstrates that the company's January conference call gave too rosy a picture of Tyco's cash position, according to Carol Levenson, director of research at Gimme Credit. "Tyco's pro forma cash position is somewhat worse than would have been implied by the earnings release because there were other uses of cash during the quarter that were not specified earlier," she says. Levenson also argues that management's cash flow projections for the rest of the year, which have been reduced, imply that the good performance in the first quarter was merely a timing difference, not a sustainable improvement in cash flow.
Kevin Morley, head of high-grade research at Credit Suisse First Boston, concedes that the company's cash flow projections, "may be subject to some debate." However, he says that Tyco does create some free cash during the year, and has no near-term liquidity issues. Morley is optimistic that favorable resolutions to a Securities and Exchange Commission investigation and a review by Standard & Poor's will cause bonds to move back to trading on a spread basis. "There are a lot of other credits with tough operating environments out there without the scandal, and the market treats them differently. The more we distance ourselves from the Kozlowski era, the more Tyco takes on a different personality," he says.