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Fitch Rates Tyco Electronics $1 Billion Senior Notes Offering 'A-'

Fitch Ratings assigns an 'A-' rating to Tyco Electronics Group S.A.'s (TEGSA) $1 billion senior notes issuance. TEGSA, a wholly owned subsidiary of TE Connectivity Ltd. (NYSE: TEL, TE Connectivity), issued:

--$500 million of floating rate senior notes due 2016;

--$250 million of 2.35% senior notes due 2019;

--$250 million of 3.45% senior notes due 2024.

A complete list of ratings is provided at the end of this release.

TEGSA will use net proceeds for general corporate purposes, including funding a portion of the $1.7 billion Measurement Specialties acquisition (which includes assumed debt) expected to close in the latter part of calendar 2014, pending customary regulatory approvals. The senior notes will be fully and unconditionally guaranteed on a senior unsecured basis by TE Connectivity.

Measurement Specialties is a provider of sensors and sensors solutions with significant capabilities in harsh environments, including automotive end markets. For fiscal 2015, Measurement Specialties' sales are expected to be more than $500 million with EBITDA margin in the high-teens.

The acquisition transforms TE Connectivity's relatively small sensors business into a leader within a large, fragmented and high-growth sensors market. In addition, TE Connectivity's scale and global reach should accelerate growth across verticals and applications.

Pro forma for the senior notes issuance, Fitch estimates total debt to operating EBITDA (leverage) was 1.5 times (x) for the latest 12 months (LTM) ended June 27, 2014. Fitch expects TE Connectivity will use free cash flow (FCF) for debt reduction to drive leverage toward 1x over the intermediate term and maintain leverage of 1x-2x through the business cycle over the long term.

The ratings and Stable Outlook continue to reflect Fitch's expectations for strong profitability and annual 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 declines in personal computing, slow mid- and down-stream energy and weak datacomm 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 margin 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 generated from the liquidation of 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 March 2014 quarter with $1 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.

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 ability to offset pricing pressures with new product introductions and productivity gains; or

--Lower than anticipated annual FCF.

Pro forma for the senior notes issuance, TE Connectivity's liquidity at June 27, 2014 was solid and supported by:

--Approximately $2.6 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 $375 million of borrowings under the CP program.

--An undrawn $1 billion bridge credit facility.

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

Pro forma for the senior notes issuance, total debt at June 27, 2014 was $4 billion and consisted of:

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

--$500 million of floating rate senior notes due 2016;

--$724 million of 6.55% senior notes due Oct. 1, 2017;

--$323 million of 2.375% senior notes due Dec. 17, 2018;

--$250 million of senior notes due 2019;

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

--$501 million of 3.5% new senior notes due 2022;

--$250 million of senior notes due 2024;

--$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); and

--$375 million of borrowings under the company's CP program.

Fitch currently rates TE Connectivity and TEGSA as follows:

TE Connectivity:

--Long-term IDR 'A-';

--Short-term IDR 'F2'.

TEGSA:

--Long-term IDR 'A-';

--Short-term IDR 'F2';

--CP program 'F2';

--Senior unsecured revolving credit facility (RCF) 'A-';

--Senior unsecured notes 'A-'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842100

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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