Fitch to Rate Tyco International's ADT North America Residential Business 'BBB+'

Upon completion of Tyco International Ltd.'s (Tyco; NYSE: TYC) planned spin-off of the ADT North America Residential (The ADT Corporation / ADT) and Flow Control (Flow) businesses, Fitch Ratings expects to assign an Issuer Default Rating (IDR) of 'BBB+' to ADT and a short-term IDR of 'F2'.

Fitch also expects to assign long- and short-term debt ratings for ADT as debt is issued, refinanced or transferred as part of the spin-off. In most cases, Fitch expects ADT's long-term debt ratings will be identical to the IDR. The Rating Outlook is expected to be Stable.

Fitch expects to rate ADT as follows:

--IDR 'BBB+';

--Senior unsecured bank credit facilities 'BBB+';

--Senior unsecured long term debt 'BBB+';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

ADT plans to have approximately $2.5 billion of debt at separation.

The ratings for ADT reflect the company's strong brand recognition, its national footprint and leading market position, recurring revenue base, sustainable FCF generation and solid liquidity. Concerns include emerging competition from non-traditional security service providers, risk associated with operating as an independent public company, and contingent liabilities, particularly tax liabilities, related to the spin-offs.

The ratings incorporate ADT's strong competitive position as the largest residential security provider in the U.S. with over 6 million customers and a roughly 25% market share based on company estimates. ADT's competitive position is supported by a nationwide network of over 200 branches, 4,500 sales professionals, and more than 3,800 installation and service technicians. Additionally, the company has nearly 400 certified dealers, which generate about 45% of its new accounts.

ADT's subscriber-based business requires significant upfront costs to generate new customers. Capital expenditures, which include dealer generated accounts and bulk purchases and subscriber systems, totaled $902 million and $801 million in 2011 and 2010, respectively. Capital expenditures represent approximately 30% of annual revenues. Fitch estimates that new customers yield an average cash payback of three years.

In spite of the large capital expenditures incurred by the company, ADT has shown the ability to generate sustainable free cash flow. ADT's subscriber-based business and recurring revenue stream contributes to steady income and cash flow. Revenues have been relatively stable as approximately 89% of its annual sales are recurring in nature. On a pro forma basis, ADT generated roughly $537 million and $269 million of adjusted free cash flow (Adjusted FCF: Cash flow from operations less capital expenditures) during 2011 and 2010, respectively. Fitch expects ADT will generate annual Adjusted FCF of approximately $500-600 million during the next few years.

Given that the company's financial results tend to be more consistent from period to period (relative to Tyco and Flow Control), ADT may undertake a more aggressive financial strategy compared to its predecessor company. Although it doesn't appear that ADT will employ high leverage in the near term, there may be strategic reasons to increase leverage in a manner that maximizes the long-term value of the company.

Fitch expects ADT will have a solid liquidity position following the spin-off. Fitch expects the company will maintain minimum liquidity of approximately $1 billion, consisting of cash and availability under a $750 million revolving credit facility that is expected to be established during the next few months.

The company expects to incur approximately $2.5 billion of debt in connection with the spin-off. Based on this capital structure, Fitch expects ADT's credit metrics will be solidly in the 'BBB+' rating category. Pro forma leverage as measured by debt to earnings before interest, taxes and depreciation and amortization (EBITDA) is projected to be approximately 1.5 to 1.8 times (x), while EBITDA to interest is forecasted to be above 14x for fiscal 2012 (ending Sept. 28, 2012).

While Fitch believes that ADT's competitive position will remain strong in the near to intermediate term, the company faces competition from non-traditional security service providers. Several cable and telecom companies have introduced interactive security services that compete with ADT. While the customer base of these companies is substantially lower than ADT at the current time, this emerging trend could provide significant competition for the company going forward. The penetration rate for cable and Internet providers is significantly higher (60-85% range) compared to traditional security providers (20% range), giving cable and telecom companies a larger customer base to sell additional product offerings and/or bundle services at perhaps more competitive prices.

After the spin-off is completed, ADT will be run by a well-seasoned management team, led by Tyco Security Systems' current president, Naren Gursahaney. While the company will have leaders with extensive company and industry experience, there are some uncertainties regarding the company's financial policies beyond the near term. Nevertheless, the company is committed to a solid investment grade rating. Fitch will continually evaluate how management will balance demands from its shareholders while maintaining its commitment to a strong investment grade profile.

As part of the separation, ADT will enter into separation and distribution and other agreements with Tyco and Flow Control which will govern the relationship between the post-separation entities and provide for the allocation of various assets (including trademarks) and liabilities and obligations (related to asbestos, pension and tax-related matters). ADT intends to enter into a Tax Sharing Agreement with Tyco and Flow that will govern the rights, responsibilities and obligations of the three post-separation companies regarding certain tax matters. The Tax Sharing Agreement will outline each company's share of certain tax liabilities. Tyco will be responsible for the first $500 million of shared tax liabilities. ADT and Flow will share 58% and 42%, respectively, of the next $225 million of shared tax liabilities. Finally, ADT, Tyco and Flow will share 52.5%, 27.5% and 20%, respectively, of shared tax liabilities above $725 million. As of Dec. 31, 2011, Tyco has recorded a liability of $437 million related to these tax matters.

Tyco International Ltd.

Fitch recently affirmed Tyco's IDR at 'A-' with a Stable Outlook. The affirmation reflects Tyco's solid credit metrics, consistent operating performance and Fitch's expectation that the company financial profile will remain stable upon completion of the planned spin-offs. The Flow business will be acquired by Pentair, Inc. (Pentair) in a reverse merger simultaneous with the separation transaction. The transactions are expected to be completed at the conclusion of the fiscal year ending Sept. 28, 2012.

The ratings of all these Tyco related entities will be subject to completion of the spin-offs consistent with terms previously communicated by Tyco. The ratings are also subject to Fitch's final review of indentures for new debt, new bank credit agreements, and sharing agreements for taxes or other liabilities.

Additional information is available at www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Fitch has conducted a Rating Assessment Service for The ADT Corporation.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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Contacts:

Fitch Ratings
The ADT Corporation
Primary Analyst
Robert Rulla
Director
[phone]
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Robert Curran
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[phone]
or
Committee Chairperson
Craig Fraser
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Tyco International Ltd.
or
Primary Analyst
Eric Ause
Senior Director
[phone]
Fitch, Inc.
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Secondary Analyst
Craig Fraser
Managing Director
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