TE CONNECTIVITY LTD.
Fitch Ratings has assigned an 'A-' issue rating to
The notes will be fully and unconditionally guaranteed on an unsecured basis by
The ratings and Outlook continue to reflect Fitch's expectations that average operating performance and financial policies will remain solidly positioned at the lower end of the 'A' category, supported by increasing electronics content that should moderate cyclicality over the longer term.
Key Rating Drivers
Automotive Sector Exposure: Fitch expects TE's exposure to automotive markets, which represent more than 40% of consolidated net revenue, will drive operating results, particularly given higher profit margins and longer product life cycles in transportation markets. Increased vehicle electrification, as well as advances in advanced driver-assistance systems, autonomous technology and hybrid/electric vehicle growth, will drive low-to mid-single-digit content growth on average through the cycle.
Financial Flexibility: Fitch believes TE's financial flexibility provides it with headroom for operational stresses and shareholder returns through the cycle. Fitch expects the company to allocate two-thirds of FCF to shareholder returns and the remainder to strategic bolt-on acquisitions. Although not incorporated in the base case, Fitch would expect larger, transformative M&A and corresponding increases in leverage above 2.0x to be temporary, consistent with the company's track record in previous acquisitions.
Market Leadership: Fitch expects TE to maintain connector market leadership, enabling the company to leverage its scale and financial flexibility relative to more fragmented markets, into which it has recently expanded. TE is the world's largest connector manufacturer, with market share in the mid-to high-teens, as estimated by private analysts. The company has leveraged acquisitions to move into related areas that include transport, industrial and medical applications, adding end-market diversification to net revenues.
Portfolio Transformation: TE continues to transform its portfolio of businesses, reducing consumer exposure while expanding beyond the core connector business into sensors and medical devices. TE's exit of lower-margin businesses and restructuring supported performance as the auto market experienced cyclicality prior to the onset of the pandemic. Fitch believes further acquisitions in areas further afield from the company's core market leadership will increasingly expose it to greater competitive pressures that could weigh on profit margin.
Derivation Summary
The ratings and Outlook are supported by TE's leading market positions across several connector categories; its broad portfolio of connectors, sensors and integrated offerings; its global presence; an embedded customer base; and Fitch's expectations for robust FCF and low total debt to operating EBITDA. TE's diverse and resilient business model and likely continued conservative financial policies provide flexibility to absorb unexpected operational or financial stresses, a key characteristic of the 'A' rating category for cyclical companies.
Fitch applies its 'Parent and Subsidiary Linkage Rating Criteria' to TE's 100% owned subsidiary TEGSA, which is a holding company that owns substantially all of TE's operating subsidiaries and an obligor of all indebtedness unconditionally guaranteed by the parent. No Country Ceiling constraint or operating environment influence was in effect for these ratings. Based on the assessment of TE's financial flexibility, Fitch assigns the higher of two short-term options (F1) for the current rating profile. Any material weakening in financial flexibility, financial structure or operating environment conditions could lead to the assignment of the lower of the two short-term rating options for the current long-term profile.
Key Assumptions
Low-single digit growth in fiscal 2023, followed by a recovery and return to low-to mid-single-digit organic growth in fiscal 2024;
High-teens fiscal adjusted operating income margin, reflecting higher structural revenue;
Capex of 5%-6% of revenue;
Mid-single-digit annual cash dividend growth;
Fitch assumes
Approximately one-third of pre-dividend FCF allocated to M&A with the balance used for capital returns via dividends and share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage, maintained below 1.5x through a cycle;
Total gross debt to FCF approaching 3.0x;
Continued successful execution of the company's growth strategy relative to secular trends.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 2.0x;
Total gross debt to FCF sustained above 4.0x;
A material reduction in market share;
Shift toward a more aggressive financial policy.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity: Liquidity is supported by cash and cash equivalents of
(C) 2023 Electronic News Publishing, source
