(The following statement was released by the rating agency)
NEW YORK, December 11 (Fitch) Fitch Ratings has assigned
Inc.'s (COL) proposed $1.1 billion floating and fixed senior
maturing in 2016, 2023 and 2043 a rating of 'A(EXP)'. COL plans
to issue the
notes to partially fund the acquisition of ARINC Inc., (Arinc)
from the Carlyle
Group for approximately $1.4 billion. COL's full rating list
follows at the end
of this release. The Rating Outlook is Negative.
The Arinc transaction is expected to close sometime in the first
2014, and COL plans to fund the acquisition cost entirely with
ratings will cover approximately $2.5 billion of long- and
giving effect to the expected issuance of new senior unsecured
additional commercial paper.
The ratings reflect Fitch's view that COL has the cash
generating ability to
reduce post-acquisition leverage to levels consistent with an
'A' rating within
12 - 24 months of the closing of the acquisition. However, COL's
be high for the current ratings immediately after purchasing
Arinc, leaving the
company's ratings exposed to unforeseen developments that could
reduce the pace
of leverage reduction. The Negative Outlook is driven by a
in COL's leverage due to the acquisition.
KEY RATING DRIVERS
Fitch's primary credit concern is the timing of COL's return to
financial metrics, including the risk of sequestration and of a
that could constrain the company's earnings and cash flow and
slow a reduction
in leverage. This concern is mitigated by COL's solid margins
and strong cash
flow generation which were typically deployed towards share
Fitch expects share repurchase activities to moderate in the
near future, and
COL will deploy its cash towards repayment of its commercial
paper expected to
be incurred in connection with the Arinc acquisition. Fitch is
with the integration risk of the acquisition as COL is not
integrating large scale operations due to the bolt-on
followed by the company in the recent past. However, Fitch
challenges could be mitigated by the treatment of Arinc as a
business unit within COL's existing organizational structure.
Fitch's other concerns include risks to core defense spending
during and after
fiscal 2014, including sequestration, COL's large pension plan
potential cash deployment actions towards acquisitions. Fitch
does not expect
COL to make other large acquisitions in the near future, but
acquisitions are possible.
Fitch estimates the issuance of debt associated with the
increase COL's debt/EBITDA to slightly above 2.0x immediately
issuance, not taking into account Arinc's pro forma financials.
At Sept. 30,
2013, COL's debt/EBITDA was 0.9x, up from 0.7x at the end of
fiscal 2012 due to
commercial paper borrowings to fund share repurchases and
Fitch expects that COL will repay acquisition-related short-term
within two years to return to stronger credit metrics with
leverage in the 1.2x
- 1.4x range by the end of fiscal 2015 (ending Sept. 30, 2015).
expects leverage to continue to decline following fiscal 2015.
COL's ratings are supported by Fitch's expectations that the
company will be
able to de-lever rapidly and reduce leverage below 1.4x by the
end of fiscal
2015 fuelled by strong cash flow from operations and free cash
flow (FCF: cash
from operations less capital expenditures and dividends). Fitch
FCF generation to range from $300 million to $400 million over
the next several
years. The ratings are also supported by an increase in high
sales, an expected diversification of revenue sources from the
acquisition, a balanced portfolio within aerospace and defense
defense spending levels, and conservative financial policies.
Arinc complements COL's strong position as the industry's
leading avionics and
cabin technologies developer by enabling the company to
diversify into another
spectrum of aviation information management such as ground to
communications. The acquisition could enable COL to develop new
solutions by combining Arinc's ground networks with its avionics
Additionally, Arinc's revenues are highly subscription based,
revenue sources and providing higher stability to its revenue
Fitch does not expect to take positive rating actions over the
years as COL will gradually reduce its leverage. Fitch may take
rating action if COL's debt reduction pace is significantly
currently anticipated due to insufficient cash generation to
reduce leverage to
the 1.2x - 1.4x range by the end of fiscal 2015. Further
negative rating actions
could be expected if defense spending cuts have a more
significant impact on the
company's earnings and FCF than currently anticipated.
Fitch currently rates COL as follows:
--Long-term Issuer Default Rating (IDR) 'A';
--Short-term IDR 'F1';
--Senior unsecured revolving credit facilities 'A';
--Senior unsecured notes 'A';
--Commercial paper 'F1'.
The Rating Outlook is Negative.
David Petu, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings
and Parent and
Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and
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