Fitch Discusses Rating Rationale behind Textron Downgrade

CHICAGO--(Business Wire)--
Late yesterday, Fitch Ratings downgraded the Issuer Default Ratings (IDRs) and
long-term debt ratings for Textron Inc. (TXT) and Textron Financial Corporation
(TFC) to 'BB+' from 'BBB-'. Fitch also downgraded the short-term IDRs and
commercial paper ratings to 'B' from 'F3'. In addition, Fitch assigned an
expected 'BB+' rating to TXT's planned issuance of convertible senior unsecured
notes due May 1, 2013.

TXT's rating downgrade and Negative Outlook reflect deteriorating operating
results at TXT and continuing concerns about TFC's asset quality and execution
risks surrounding plans to exit TFC's non-captive finance business. The rapid
deterioration in some of TXT's manufacturing businesses has exceeded Fitch's
downside scenarios, and Fitch believes this has left the parent with less
capacity to support TFC as it winds down its non-captive business lines in a
difficult business environment. These concerns more than offset the positive
impact on TXT's liquidity from its planned issuance of debt and equity.

Yesterday, TXT announced its intention to issue $300 million of senior unsecured
convertible notes and 19 million shares of common stock. The exact amounts and
terms have not been finalized. Proceeds will be used to increase TXT's cash
balances and support the company's liquidity, including funds available to fund
future debt repayment. The increase in equity strengthens TXT's capital base and
mitigates the increase in gross leverage. The new debt and equity issuance will
increase the company's financial flexibility as TFC liquidates its non-captive
finance portfolio.

Continued pressure on asset quality coupled with significant reliance on cash
flow generated via liquidation of portfolio receivables to meet maturing debt
obligations and continued support from TXT to meet financial covenants has
limited TFC's financial flexibility.

Fitch recognizes that management has been exploring various alternatives to
address liquidity concerns, including efforts to accelerate repayment of
portfolio receivables, assets sales and capital market transactions. While Fitch
believes the company has made near-term progress and will likely have sufficient
capacity, via existing cash balances and expected cash proceeds from the
liquidation of TFC's non-captive portfolio receivables, to meet TFC's debt and
funding obligations in a timely fashion, execution risks and the uncertainty and
reliance on cash flow generated via the exit from non-captive finance are high,
particularly in light of difficult economic circumstances and the potential for
significant asset quality deterioration. Furthermore, TFC's near-term
profitability and operating performance will remain weak, which will require TXT
to continue to make modest capital contributions as required under its support
agreement to maintain TFC's fixed charge ratio at 1.25 times (x). Fitch believes
these factors are inconsistent with investment grade ratings.

The Negative Outlook also reflects the challenges relating to the liquidation of
TFC's non-captive portfolio in the current operating environment. If TFC is
unable to exit its non-captive assets in a timely manner or at reasonable
values, the ratings could be pressured on the downside. On the other hand,
further actions to successfully generate additional cash via either financing or
asset sales would be viewed positively and would help to alleviate current
downward rating momentum. Fitch expects such challenges to remain for the
intermediate term.

TXT's manufacturing businesses have experienced a significant decline in demand
due to the global economic recession, especially at the Cessna and Industrial
segments. The primary credit concern for the manufacturing businesses is the
sharp drop-off in demand for business jets. TXT has lowered its estimate for
deliveries in 2009 to 290-300 aircraft, a 37% reduction from the 467 jets that
were delivered in 2008. TXT reported 92 net cancellations in the first quarter
of 2009, indicating that deliveries may not soon return to previous levels. The
impact is partly offset by Cessna's large backlog that totaled $13.0 billion at
the end of the first quarter of 2009 after peaking at $15.6 billion in September
2008 although approximately $2.4 billion is for the Citation Columbus on which
development has been suspended until market conditions improve.

Losses in the Industrial segment could be higher in 2009 than Fitch had
expected. The segment has a large exposure to the automotive segment through its
Kautex business, but the segment has typically represented a relatively small
proportion of TXT's overall profitability. Results at the Bell and Textron
Systems segments are more stable due to their exposure to defense spending,
although some parts of the Systems segment are performing weaker than Fitch had
expected.

As a result of lower sales and margins across TXT's manufacturing group
anticipated in 2009, free cash flow could be pressured, although Fitch believes
that manufacturing cash flow will still be positive for the year. TXT has
expanded its restructuring efforts in order to bring costs in line with demand,
including actions to reduce its work force by 19%. Working capital may serve to
dampen the negative impact on free cash flow in the near term as Cessna delivers
aircraft at a much lower rate. Lower operating earnings, combined with TXT's new
debt, can be expected to pressure the company's credit measures during 2009,
with gross debt to EBITDA possibly rising above 3.0x, compared to 1.5x in 2008.

Fitch believes TXT has sufficient flexibility to manage its manufacturing
businesses through the current recession and could be a weak investment grade
company on a stand-alone basis. However, when considering its obligations to
support TFC, it does not reflect an investment grade profile in Fitch's view,
particularly given TFC's stand-alone financial profile. TXT has less financial
capacity than in the past to support TFC while TFC copes with an especially
difficult business environment. Risks related to TFC's asset quality and
liquidation could potentially strain TXT's liquidity and are reflected in the
current ratings and outlook. Fitch expects TXT to make additional capital
contributions to TFC.

Textron's consolidated cash balances increased by over $1.1 billion during the
first quarter of 2009, to $1.7 billion. The increase included the impact of a
full drawdown of $3.0 billion of committed bank facilities in February 2009,
along with the repayment of commercial paper backed by the facilities. The bank
facilities mature in 2012. TXT's and TFC's exposure to risks related to
short-term funding have been reduced by the transaction and by the planned
issuance of debt and equity. However, the draw-down of the bank facilities
potentially makes covenant compliance under the facilities a material credit
issue. Fitch estimates that TXT is well within the required range of its debt to
capitalization covenant. TFC will continue to rely on TXT to help maintain its
fixed charge ratio at 1.25x.

At TXT there are minimal scheduled debt maturities until 2010 when $250 million
is scheduled to mature. Other cash requirements include pension contributions
that are not expected to increase significantly from modest amounts until at
least 2010. TXT's liquidity has benefited from two actions in the first quarter
of 2009: the decision to reduce the company's dividend payout by 91%, equivalent
to approximately $200 million annually, and the sale of HR Textron for after-tax
cash proceeds of approximately $265 million. An ongoing concern for TXT is its
support for TFC through required capital contributions under its support
agreement. In 2008 TXT contributed $625 million to TFC. Much of the cash can be
returned to TXT through dividends, but the support agreement highlights TXT's
exposure to TFC.

Due to the existence of a support agreement and other factors, TFC's ratings are
linked to TXT's ratings. The support agreement requires TXT to maintain TFC's
floor net worth and fixed charge coverage at $200 million and 1.25 times,
respectively.

Debt totaled approximately $10.8 billion at April 4, 2009 including $2.9 billion
at TXT and $7.9 billion at TFC.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, 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 Ratings
Eric Ause, +1-312-606-2302 (Textron Inc.)(Chicago)
Craig Fraser, +1-212-908-0310 (Textron Inc.) (New York)
William Artz, +1-312-368-3178 (Textron Financial) (Chicago)
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com

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