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Tyco Shares Plunge on growing Worries of a Cash Squeeze
By:
Alex Berenson and Ross Sorkin
Wall Street grew increasingly nervous yesterday about the prospect of a
cash squeeze at Tyco International after the company lost access to the
commercial paper market, which is a major source of financing for big
companies, and two debt rating agencies lowered their ratings on Tyco's
bonds. Tyco, a Bermuda-based conglomerate with headquarters in Exeter, N.H.,
lost almost one-sixth of its market value, closing at $29.90, down $6.96 a
share. So far this year, Tyco's stock has dropped about 50 percent amid concerns
that the company uses aggressive accounting practices to inflate its growth
rate and profits. Reports last week that Tyco's top two executives quietly sold more than
$100 million in stock last year and that Tyco paid a director $10 million
for arranging an acquisition have added to investors' confusion. Now the
company's rising debt load has begun to unnerve Wall Street, financial
analysts said. Tyco said yesterday that it would draw down $5.9 billion in bank lines of
credit, largely to repay its $4.5 billion in commercial paper. By turning to
the bank line, Tyco tacitly acknowledged that it could no longer borrow in
the commercial paper market, the cheapest source of short-term financing,
analysts said. "The lack of confidence in the company by the capital markets to a
degree becomes a self-fulfilling prophecy," said Mark Oline, a managing
director at Fitch Ratings, a debt-rating agency. Fitch lowered its rating on
Tyco's bonds from A to A- yesterday, while Standard & Poor's lowered its
rating from A to BBB. Both ratings remain well above junk status. Tyco's chairman, L. Dennis Kozlowski, said yesterday that the company had
arranged an additional $1.5 billion credit line two weeks ago, just before
it announced plans to split into four companies, reversing a decade-long
strategy of growth by acquisition. Mr. Kozlowski said Tyco had decided to
draw down the credit line last week to ensure that it would have enough cash
to operate under any circumstances. Last month, Tyco said that it would
split into four companies. Tyco, which employs 240,000 people, has spent $30
billion in cash and stock to buy other companies in the last three years
alone. As part of the breakup, Tyco intends to raise $11 billion by selling
shares in the divisions it spins off. That money will go to reduce Tyco's
debt, which totaled almost $25 billion as of Dec. 31, the company said.
Because it will take time to complete the spinoffs, Tyco has decided to
raise as much cash as it can while it waits, Mr. Kozlowski said. "We
decided to totally secure ourselves," he said. Of the money Tyco is borrowing, $3.9 billion is from a line of credit
that would have expired tomorrow. Tyco said it could easily have renewed the
line had it wished to. Mr. Oline, the Fitch analyst, said Tyco was suffering to some degree from
Enron ripple effects. "In this era, post-Enron, anything with a whiff
of uncertainty encourages people to bail first and ask questions
later," he said. Despite investor fears, Tyco should not run out of cash anytime soon, Mr.
Oline said. Including the commercial paper and the $1.5 billion credit line,
which comes due in June, Tyco has about $7 billion in debt repayments due
this year, less than the $7.4 billion it has borrowed in the last two weeks
alone. But next year, Tyco has more than $5 billion in loans and bonds to
refinance or repay. In addition, the company has almost $6 billion in
convertible debt that it may be forced to repay, although it can choose to
issue new stock in exchange for the convertibles, rather than cash. Tyco has
said that it should be able to repay its debt easily because it will
generate almost $10 billion in free cash over the next two years. Short
sellers question whether the company's reported cash flows are accurate. Tyco's earnings have risen steadily for the last several years, but short
sellers, who profit when a company's stock drops, say the profit gains have
come mainly from gimmicks used when Tyco takes over companies. Tyco has denied those allegations and has said that its accounting is
proper. PricewaterhouseCoopers is the company's auditor. Tyco has declined
to disclose the balance sheets of the companies it takes over at the time
they are folded into Tyco. Short sellers say such information could
demonstrate whether Tyco is inflating its profits. Brad McGee, an executive vice president of Tyco, said yesterday that Tyco
was considering making the balance sheets and some other information
available to investors. "We are actively looking at a way we can provide some disclosure in
this area," Mr. McGee said. Michael Regan, an analyst at Credit Suisse First Boston, said investors
had already been concerned about Tyco's growth rate and accounting
practices. The latest announcement about the bank lines raised worries about
the company's cash position, he said. But those concerns are misplaced, Mr. Regan said. Tyco, he said, will
generate billions of dollars in cash this year and next, and it has more
than enough cash to cover its debt repayments and operating costs. Tyco's financial unit, Tyco Capital, will be renamed CIT, the name of the
business before it was acquired last year, the company said yesterday. Albert Gamper, Tyco Capital's chief executive, said in a conference call
yesterday that "there's no question" that the credit market
"has been extremely tight and restricted to us." He added:
"We're disappointed by that. We're frustrated by that." Tyco. meanwhile, attacked The Wall Street Journal and TheStreet .com
after those publications ran articles contending that the company had not
disclosed billions of dollars in acquisitions to investors. Mr. McGee said
that Tyco had disclosed all the money it had spent on acquisitions in its
financial statements, although it had not disclosed each specific purchase
because it made 350 acquisitions last year alone. Disclosing every acquisition would "require a press release at least every day," Mr. McGee said. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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