Fitch Expects to Rate Alliant Techsystems Senior Subordinated Notes Due 2020 'BB-'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BB-' rating to Alliant Techsystems' (NYSE:ATK) $300 million issuance of senior subordinated notes due 2020. Proceeds are earmarked for refinancing $280 million 2.75% convertible senior subordinated notes due 2024.

ATK's Issuer Default Rating (IDR) is rated 'BB' by Fitch. A complete list of ratings is at the end of this press release. On a pro forma basis, approximately $1.4 billion of debt is covered by the ratings. The Rating Outlook is Stable.

The company is issuing new debt to refinance the 2.75% convertible senior subordinated notes due 2024. ATK is exercising its right to redeem all of the notes for cash with 30 days notice. If these notes were not called, bondholders would have the right to put the notes to ATK for cash on Feb. 15, 2014 or Feb. 15, 2019. The notes also could be converted at a rate of $79.46 per share if the stock price exceeds certain triggers or if certain corporate transactions take place; in that event, ATK must satisfy the par value of the notes with cash and any applicable premium, if any, with cash, stock or a combination of both at its discretion.

Further changes to the debt structure are under consideration by the company. ATK may refinance its existing secured bank facility due 2012 which is comprised of the $500 million revolver and $257.8 million term loan with a new five year facility which could have a $600 million revolver and $400 million term loan.

Key ratings factors include ATK's healthy free cash flow and solid credit metrics; high levels of spending for munitions and some missile defense programs in the U.S. Department of Defense (DOD) budget; potential revenue growth from the Joint Strike Fighter program; expansion of sales of commercial products; and ATK's role as a sole source provider for many of its products to the U.S. Government. The ratings acknowledge the uncertainty about funding for the Constellation program in the NASA budget beyond the government's fiscal year 2011 (FY11). Other concerns include potential U.S. budgetary pressures in the longer term; the company's history of increasing leverage for acquisitions; a lack of diversity compared to other large and medium sized defense contractors; the amount of revenue generated by operations in Iraq and Afghanistan; and pension plan funding.

The Stable Rating Outlook reflects the current high levels of defense spending, U.S. Army training requirements that should result in continued high usage of munitions, and the general level of the company's credit metrics for the rating category.

Fitch continues to expect ATK to have sufficient liquidity in FY11. At the end of the first quarter of FY11 which ended July 4, 2010, ATK had $417 million of liquidity which consisted of $92 million of cash on hand and $325 million available on the $500 million secured revolver. Fitch notes that the cash on the balance sheet declined by approximately $300 million in the recent quarter following significant working capital requirements of $221 million and the cash payment of $172 million for the acquisition of Blackhawk Industries Products Group Unlimited, LLC.

Historically, the company has a solid track record of cash flow generation when adjusted for discretionary pension contributions (as was done in FY07 and FY10). In FY10, the company generated free cash flow of approximately $50 million after accounting for $300 million of pension contributions. At the end of March 31, 2010 the pension plan was underfunded by $627 million, or funded 76%. Fitch believes that the pension is going to have to be a continuing use of cash given the funding position and the likely decline in the discount rate if interest rates stay low.

Leverage has been on the decline since FY07 when ATK issued debt to fund its pension plan and repurchase shares, causing leverage to increase to 3.5 times (x). At the end of the first quarter of FY11 which ended July 4, 2010, leverage was 2.1x and only increases to 2.2x on a pro forma basis when accounting for a $20 million increase in debt with the new note offering.

Following the call of the 2.75% notes due 2024, the company's next debt maturity is for $300 million of convertibles due September 2011. To offset the potential stock dilution of the convertible notes, ATK has call options on its stock for 3.1 million shares and warrants for 3.3 million shares. The conversion price on these notes is $96.51. With the stock options and warrants, the effective conversion price is $116.75 per share for ATK. After these notes are due, ATK's $500 million secured revolver and $258 million secured term loan are due in 2012.

The company's other convertible note is $199 million of 3% convertible senior subordinated notes due 2024. These notes have a dilutive effect on the earnings per share when the stock exceeds $79.75 per common share. ATK can redeem a portion or all of the notes for cash on or after Aug. 20, 2014. Noteholders have the right to put a portion or all of the notes for cash on Aug. 15, 2014 and on Aug. 15, 2019. In addition, the notes have a conversion rate of 12.5392 shares (conversion price of $79.75 per common share). In fiscal 2009, $547,000 of these notes was converted.

Changes beyond the elimination of the Constellation program within the NASA budget or for cuts in defense spending could have a negative impact on ATK. The company received 69% of its revenues from the U.S. government in FY10, and the U.S. Army accounted for 28% of the total sales (with 13% of the total sales coming from one contract for ammunition). Sales to NASA accounted for 18% of FY10 revenues; sales associated with the Constellation program were approximately 8% of total FY10 sales, or approximately $370 million.

Fitch rates ATK as follows:

--IDR at 'BB';

--Senior secured term loan at 'BBB-';

--Senior secured revolver at 'BBB-';

--Convertible senior subordinated notes at 'BB-';

--Senior subordinated notes at 'BB-'.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

--'Corporate Rating Methodology', Aug. 16, 2010;

--'Rating Aerospace and Defense Companies: Sector Credit Factors', June 10, 2010.

Related Research:

--'Aerospace & Defense Midyear Credit Review and Outlook', Aug. 4, 2010.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Rating Aerospace and Defence Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=529973

Aerospace & Defense Midyear Credit Review and Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=539172

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