September 18, 2017 / 6:11 PM / 2 years ago

Northrop Grumman scores biggest U.S. defense acquisition loan in six years

NEW YORK (Reuters) - Global defense and security systems company Northrop Grumman is backing its US$9.2bn purchase of aerospace and defense technology company Orbital ATK with an US$8.5bn bridge loan, the largest loan for an acquisition by an investment-grade company in the sector in six years.

FILE PHOTO: The Orbital ATK Antares rocket, with the Cygnus spacecraft onboard, is seen on launch Pad-0A, at NASA's Wallops Flight Facility in Virginia October 15, 2016. Bill Ingalls/NASA/Handout via REUTERS

The 364-day senior unsecured bridge financing, which is initially provided by JP Morgan, will be replaced with a permanent financing prior to the closing of the acquisition.

The deal comes just two weeks after aerospace and industrial company United Technologies Corp said it would buy avionics supplier Rockwell Collins Inc for US$30bn, including Rockwell’s debt, in the sector’s largest-ever merger.

Northrop Grumman’s bridge loan tops the US$6.5bn 364-day bridge financing that United Technologies launched September 6 to back its merger - the first loan backing M&A in the investment-grade aerospace arena this year - and is the largest since a US$15bn bridge that United Technologies lined up for its purchase of Goodrich Corp that was announced in September 2011, according to Thomson Reuters LPC.

Northrop Grumman is acquiring junk-rated Orbital ATK for around US$7.8bn in cash plus US$1.4bn in assumed net debt.


The back-to-back deals help prop up investment-grade lending, which had been subdued much of the year by the ongoing wait for legislative action on US tax, trade and healthcare reform. In the absence of new policies well into the year, however, mergers have been gaining traction, particularly among companies eager to grow by acquisition and expecting little regulatory resistance to their tie-ups.

Strategic transactions of companies with complimentary businesses that face few antitrust hurdles “might still prevail regardless of the unknowns in the marketplace,” said one senior banker. “I wouldn’t be surprised to see more, but I’m not expecting it to pick up so much that we have a record year in M&A at this point in the year.”

Investment-grade loan issuance overall was down 10% through the end of August at US$479bn, compared with US$532bn in the same period last year, LPC data show. Bridge loan volume in that time was down 21% to US$53bn compared with US$67bn at the same time last year.

With its merger, Northrop Grumman gains access to lucrative government contracts, expanding its arsenal of missile defense systems and space rockets, at a time when North Korea is testing threatening missiles and nuclear weapons, Reuters reported. Orbital has contracts with NASA and the US Army.

Banks will earn about US$25m in fees for arranging the bridge loan, according to Freeman Consulting Services.

“We’re starting to see the deal activity catch up to some of the appetite that’s been telegraphed by the capital markets overall,” said another senior banker.

Companies this year have swiftly replaced bridge loans with longer-term permanent financing, pushing to lock in relatively low borrowing costs at a time when demand for corporate bonds remains elevated, bankers have said.

Northrop Grumman’s acquisition is expected to close in the first half of next year.

The company is rated BBB+ by S&P and Baa1 by Moody’s Investors Service. Northrop Grumman said in a Monday statement that it is committed to maintaining investment-grade ratings and would use its strong cash flow to support debt reduction.

The rating agencies warned of a downgrade after the all-cash acquisition was announced.

Reporting by Lynn Adler; Editing By Michelle Sierra

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