NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned Alliant Techsystems, Inc.'s proposed $300 million senior unsecured notes a rating of 'BB+(EXP)'. ATK plans to issue the notes to partially fund the acquisition of Bushnell Group Holdings, Inc.' (Bushnell) from MidOcean Partners for approximately $1 billion. ATK's full rating list follows at the end of this release.
The Bushnell transaction is expected to close sometime in the third quarter of fiscal 2014 ending March 30, 2014. ATK plans to fund the acquisition cost almost entirely with debt. Fitch's ratings currently cover approximately $1.3 billion of debt and will cover approximately $2.3 billion of long- and short-term borrowings giving effect to indebtedness expected to be incurred in connection with the Bushnell acquisition.
KEY RATING DRIVERS
Fitch's primary credit concern is the timing of ATK's return to stronger financial metrics, which could be negatively affected by the risk of sequestration and an economic downturn in the sporting goods industry, constraining the company's ability to reduce leverage as anticipated. This concern is mitigated by ATK's solid margins and strong cash flow. Fitch expects ATK to continue making significant pension plan cash contributions and deploy its cash toward moderate share repurchases and dividends, while deploying all remaining free cash toward reducing the debt incurred in connection with the Bushnell acquisition.
Fitch is also concerned with the integration risk of the Bushnell acquisition. This risk is heightened by the on-going integration of Savage Sports Corporation (Savage), a $315 million acquisition in the first quarter of fiscal 2014.
Fitch estimates the issuance of debt associated with the acquisition will increase ATK's debt/EBITDA to approximately 3.8x immediately following the issuance and not taking into account Bushnell's and Savage's pro forma financials. At June 30, 2013, ATK's debt/EBITDA was 2.3x, up from 1.8x at the end of fiscal 2013 (ended March 30, 2013), due to a $200 million draw on its revolving facility to fund the Savage acquisition and on-going operations. Including the pro forma EBITDA impact from the acquisitions and some debt reduction, Fitch expects ATK could reduce its leverage to 3.0x or slightly lower by the end of its fiscal 2014 ending in March.
Fitch's other concerns include risks to core defense spending during and after fiscal 2014, including sequestration risk, an anticipated decline in small-caliber ammunition demand and lower contract rates which resulted from the renewal of the Lake City operating contract in fiscal 2013, and lower modernization activities at Lake City. Fitch is also concerned with the low funded status of ATK's pension (77% funded); NASA funding priorities after fiscal 2013; and exposure to significant margin fluctuations in ATK's Sporting Group.
Following the Bushnell acquisition, ATK will be highly exposed to a downturn in the sporting goods industry as the Sporting Group will account for more than 40% of the company's revenues. Fitch does not expect ATK to make other large acquisitions in the near future, and possible debt funded acquisitions would represent a rating risk and are likely to result in negative rating action.
ATK's ratings and Stable Outlook are supported by Fitch's expectations that the company will be able to de-lever rapidly and reach approximately 2.5x-2.7x leverage by the end of fiscal 2015. The ratings are also supported by positive free cash flow (FCF; cash from operations less capital expenditures and dividends); an increase in higher margin commercial sales; an expected diversification of revenue sources from the Bushnell and Savage acquisitions; steady margins which are projected to increase slightly in fiscal 2014 driven by the strength of Sporting Group; adequate liquidity; and ATK's role as a sole source provider for many of its products to the U.S.
The Bushnell and Savage acquisitions complement ATK's strong position within the sporting goods industry by enabling the company to diversify into different product types. Savage offers ATK an opportunity to enter the firearm manufacturing segment, providing the company with opportunities to leverage its accessories business and strong distribution channels. The Bushnell acquisition diversifies ATK's current portfolio of sporting goods accessories and sports optics. It also provides an entry to the performance and safety eyewear market. Additionally, the acquisitions will decrease ATK's exposure to U.S. government spending and will increase its commercial and international presence.
Fitch does not expect to take positive rating actions over the next several years, as ATK will gradually reduce its leverage. Fitch may take a negative rating action if ATK's debt reduction pace is significantly slower than currently anticipated due to cash generation insufficient to reduce leverage to the 2.5x-2.7x range by the end of fiscal 2015. Further negative rating actions could be expected if the company completes another debt funded acquisition.
Fitch has assigned ATK the following rating:
-- Senior unsecured bank facility 'BB+(EXP)'.
Fitch rates ATK and its debt as follows:
--Long-term IDR at 'BB+';
--New Senior secured bank facility 'BBB- (EXP)';
--Senior secured bank facility at 'BBB-';
--Convertible senior subordinated notes at 'BB';
--Senior subordinated notes at 'BB'.
The Rating Outlook is Stable. Fitch expects to withdraw its rating from the current senior secured bank facility upon the closure of the transaction.
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);
--'Treatment and Notching of Hybrids in Corporates and REIT Credit Analysis' (Dec. 13, 2013).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage