TEXT-Fitch affirms L-3 Communications at 'BBB-'
Sept 27 - Fitch Ratings has affirmed the 'BBB-' Issuer Default Ratings (IDR) and debt ratings for L-3 Communications Holdings, Inc. (L-3) and L-3 Communications Corporation. The Rating Outlook is Stable. Approximately $3.9 billion of outstanding debt is covered by these ratings. The senior subordinated ratings remain one notch below L-3's IDR and senior unsecured debt due to contractual subordination. Convertible contingent debt securities are also rated one notch below the IDR and senior unsecured debt due to subordination of its guarantees., the most relevant part of the budget for defense contractors, is down 4%, the third consecutive annual decline by Fitch's calculations. The overhang of potential automatic cuts beginning in early 2013 related to the 'sequestration' situation, as well as the presidential election, add to the uncertainty faced by defense contractors in the current environment. The U.S. defense outlook will be uncertain and volatile over the next one to two years, and program details will be needed to evaluate the full effect on LLL's credit profile. On Sept. 14, 2012, the Office of Management and Budget issued a Sequestration Transparency Act report detailing the potential impact of sequestration on funding reductions for both defense and nondefense budget accounts. The report assessed that unless the sequestration law is changed, the DoD budget will be cut by approximately $52 billion in FY2013. Budget cuts to Modernization Spending would be expected to account for approximately $23 billion or nearly 44% of the cuts despite comprising only 29% of the total DoD budget. The majority of the remaining cuts will be in the Operations and Maintenance account. Should sequestration occur, the cuts in Modernization Spending could be partly mitigated by low outlay rates during the first year for the majority of Procurement and R&D programs. Fitch would not expect sequestration-driven DoD spending declines alone to lead to negative rating actions for L-3. The company's exposure to DoD spending is mitigated by good liquidity and the diversification of its product line. L-3's sales are not tied to any major program as the company does not have a contract which represents more than 3% of its revenues. A higher percentage of sales to foreign customers also mitigate the budget cut risks. What Could Trigger a Rating Action: Fitch may consider a positive rating action should L-3 improve its credit profile by further decreasing leverage and moderating its shareholder friendly cash deployment strategies in form of share repurchases and dividends. A negative rating action may be considered if L-3 completes a large debt-funded acquisition which weakens L-3's credit profile. A negative action is also possible should there be a dramatic change in U.S. defense spending policies, but an action would depend on L-3's efforts to reduce costs in line with lower revenues. Fitch affirms L-3's ratings as follows: L-3 Communications Holdings, Inc. --IDR at 'BBB-'; --Convertible contingent debt securities at 'BB+'. L-3 Communications Corporation --IDR 'BBB-'; --senior unsecured notes at 'BBB-'; --Senior unsecured revolving credit facility at 'BBB-'; --Senior subordinated debt at 'BB+'. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology', Aug. 8, 2012. Applicable Criteria and Related Research: Corporate Rating Methodology