One analyst says investors should buy Tyco International, another says they should not. The divergent opinions follow L. Dennis Kozlowski's resignation last week as ceo of the conglomerate, and his indicted for tax evasion. Last Tuesday morning, when an indictment appeared probable, Tyco's 6.75% notes of '11 (Baa2/BBB) were trading at a bid of 82, six points below where they had traded the previous week.
The negative news has further damaged investor confidence and will likely complicate Tyco's planned sale of its CIT Group unit, according to Carol Levenson, director of research at Gimme Credit, an independent research firm. Levenson also notes that bondholders have a new management team to reckon with, the financial policies of which are unknown. "I believe the risk regarding Tyco's future is unquantifiable at the moment, so I would not be recommending the paper to my total rate of return clients because I don't know what the bottom might be. At some point this passes into the realm of distressed securities analysis, which is beyond my area of expertise," she says.
But, Bill Reed, managing director at Deutsche Bank and a perennial member of the Institutional Investor All-America Fixed-Income Research Team reiterates his buy on the bonds. He argues that management teams of Tyco's various business segments operate with a great deal of autonomy, and should not be affected by the former chairman's resignation. He points to Tyco's free cash flow of $3-4 billion, and its capacity to reduce debt by up to $8 billion over the next 12 months. Reed would not discuss issues surrounding the CIT sale, however, citing a potential investment banking conflict.