Fitch Upgrades TE Connectivity's IDR to 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has upgraded the Long-term Issuer Default Ratings (IDR) for TE Connectivity Ltd. (NYSE: TEL, TE Connectivity) and its wholly owned subsidiary, Tyco Electronics Group S.A.'s (TEGSA) to 'A-' from 'BBB+'. In addition, Fitch affirms the Short-term IDRs for both companies at 'F2'. A list of rating actions follows the end of this release. The Rating Outlook is Stable. Fitch's actions affect approximately $3 billion of total debt.

The ratings and Outlook reflect Fitch's expectations for strong profitability and annual free cash flow (FCF) through the business cycle, continued top line benefits from diversified sales portfolio and conservative financial policies.

Fitch expects the company's end market and geographic diversification will drive solid top line growth over the longer-term, albeit within a cyclical context. For fiscal 2014, Fitch expects solid global automotive production, strong commercial aerospace orders and recovering industrial equipment markets to offset declining personal computing, slow mid- and down-stream energy and weak telecom markets to drive mid-single digit revenue growth.

Fitch has increased confidence in TE Connectivity's ability to offset average annual price erosion with new product introductions (NPI) and productivity gains, resulting in expectations for mid-cycle operating EBIT in the high-teens. TE connectivity's consistent research and development investments drive more than a quarter of annual revenues from NPI, while ongoing efficiency programs and footprint optimization provide a sustainable cost reduction roadmap.

Fitch expects annual FCF will range from $750 million to $1.25 billion through the cycle, with mid-cycle FCF in excess of $1 billion. In a downturn, TE Connectivity offsets lower profitability with cash from the liquidating short-cycle inventory, as the company did in fiscal 2009. Fitch expects FCF will be used to fund share repurchases and smaller acquisitions. The company ended the Dec. 2013 quarter with $1.3 billion available for repurchase under the current stock buyback programs.

Other uses of cash include cash pension obligations, which should be minimal over the next few years, and potential cash payments related to the company's pre-separation tax sharing agreement with Tyco International and Covidien. Fitch expects obligations will be manageable at the current rating and a longer-term event.

Credit protection measures will remain solid for the rating. Total debt to operating EBITDA will range from 1x to 2x over the longer-term with the potential for slightly higher levels over the short-term related to a downturn or acquisitions. Interest coverage should remain in excess of 15x.

KEY RATING DRIVERS

The ratings and Outlook reflect TE Connectivity's:

--Diversified geographic, end-market and customer portfolios, industry-leading positions in large and relatively fragmented markets; and substantial scale and scope, which should result in longer-term share gains in faster-growing developing markets;

--Consistent annual FCF of $750 million to $1.25 billion; and

--Conservative financial policies, including solid liquidity and commitment to managing debt levels to maintain total leverage target at or below 2x;

Fitch's rating concerns center on:

--The company's need to mitigate average selling price (ASP) pressures in the majority of its end-markets with efficiency initiatives and new product introductions, as well as vulnerability of gross profit margin over the short-term to commodity price volatility;

--The cyclical demand patterns associated with electronics components;

--The company's use of cash for share repurchases and acquisitions, given mature organic revenue growth prospects across certain key end-markets.

RATING SENSITIVITIES

Fitch believes further positive rating action is unlikely in the absence of expectations for structurally higher mid-cycle FCF or a commitment to more conservative financial policies.

Conversely, Fitch may take negative rating actions if:

--Expectations for operating profit margins to remain below the 10% - 15% range over the longer-term, likely due to a diminished inability to offset pricing pressures with new product introductions and productivity gains; or

--Lower than anticipated annual FCF.

TE Connectivity's liquidity was solid at Dec. 27, 2013 and supported by:

--Approximately $1.4 billion of cash and cash equivalents;

--An undrawn $1.5 billion, five-year revolving credit facility expiring August 2018. This credit facility backs up the company's up to $1.25 billion commercial paper (CP) program. Availability under the revolving credit facility expiring currently is reduced by $325 million of borrowings under the CP program.

Fitch's expectations for strong annual FCF also support liquidity.

Following the November 2013 $325 million 2.375% 5-year senior note issuance and redemption of $300 million of notes due in 2014, total debt at Sep. 27, 2013 was approximately $3 billion and consisted of:

--$250 million of 1.6% new senior notes due 2015;

--$727 million of 6.55% senior notes due Oct. 1, 2017;

--$325 million of 2.375% senior notes due Dec. 17, 2018;

--$263 million of 4.875% senior notes due Jan. 15, 2021;

--$498 million of 3.5% new senior notes due 2022;

--$475 million of 7.125% senior notes due Oct. 1, 2037;

--$89 million of 3.5% convertible subordinated notes due 2015 (legacy ADC Telecommunications notes);

--$325 million of borrowings under the company's CP program;

--Other debt of approximately $62 million.

Fitch has taken the following ratings actions:

TE Connectivity:

--Long-term IDR upgraded to 'A-' from 'BBB+';

--Short-term IDR affirmed at 'F2'.

TEGSA:

--Long-term IDR upgraded to 'A-' from 'BBB+';

--Short-term IDR affirmed at 'F2';

--CP program affirmed at 'F2';

--Senior unsecured revolving credit facility (RCF) upgraded to 'A-' from 'BBB+';

--Senior unsecured notes upgraded to 'A-' from 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818938

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jason Paraschac, CFA, +1-212-908-0746
Senior Director
or
Committee Chairperson
Jamie Rizzo, CFA, +1-212-908-0548
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jason Paraschac, CFA, +1-212-908-0746
Senior Director
or
Committee Chairperson
Jamie Rizzo, CFA, +1-212-908-0548
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com