Nov 27 - Fitch Ratings has assigned an 'A-' rating to Raytheon Company's
(RTN) planned issuance of senior unsecured notes in the range of up to
$1 billion maturing in 2022. Proceeds will be used to redeem a total of
approximately $1 billion of senior unsecured notes maturing in 2014 and 2015 and
for general corporate purposes. RTN's leverage is expected to remain virtually
unchanged because of the company's plans to redeem some of its outstanding
notes. The Rating Outlook is Stable. A full rating list appears at the end of
RTN's ratings are supported by the company's competitive position in the defense
industry; good product diversification; a large portion of revenues derived from
international sales; strong liquidity; and large backlog. Healthy free cash flow
(FCF) generation and increasing international demand also support the ratings.
Concerns include U.S. government budget deficits and their impact on defense
spending including the potential for an additional $500 billion of reductions to
the Department of Defense (DoD) budget starting in January 2013; the large
pension deficit and its impact on cash flows; cash deployment strategies that
include increasing dividend payout and sizable share repurchases; and to a
lesser extent, some pending legal issues, including one with the U.K. Home
Office for the termination of the e-Borders program.
RTN's credit metrics have deteriorated over the past two years due to bond
issuances that doubled the company's debt from $2.3 billion at Sept. 26, 2010 to
approximately $4.7 billion in principal at Sept. 30, 2012. Of the $2.4 billion
additional debt, RTN used $1.5 billion for discretionary pension contributions.
Fitch views RTN's credit metrics as adequate even after the debt issuances in
light of its high level of international sales, high product diversification
with low exposure to any given defense program, solid liquidity and strong cash
generation. Fitch notes that RTN's cushion to withstand negative developments at
the 'A-' level is reduced due to increased leverage., 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 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 RTN's credit profile.
Fitch would not expect modest declines in defense spending to lead to a negative
rating action because RTN's exposure to DoD spending is mitigated by good
liquidity, diversification of its product line, and high percentage of sales to
foreign customers, all of which make up fixed price contracts. RTN's sales are
not tied to any major program and its largest program is the Patriot Missile
Long-Range Air-Defense System, one of the most funded and sought after systems
worldwide. RTN does not have a single contract which represents more than 5% of
the company's revenues.
What Could Trigger A Rating Action
Despite increased leverage and concerns regarding the U.S. budgetary
environment, RTN's liquidity position and strong cash generation afford the
company some cushion to withstand negative developments at the current ratings.
Fitch may consider a negative rating action should there be a dramatic change in
U.S. defense spending policies, poor execution on a number of key contracts,
and/or a major change in the company's financial strategy. A positive rating
action is unlikely in the near term given increased leverage, the company's cash
deployment strategies, and the current uncertainty surrounding U.S. federal
Fitch currently rates RTN as follows:
--Issuer Default Rating (IDR) 'A-';
--Senior unsecured debt 'A-';
--Bank facilities 'A-';
--Short-term IDR at 'F2';
--Commercial paper programs 'F2'.
The Rating Outlook is Stable