Fitch Rates Rockwell Collins' Proposed Senior Unsecured Notes 'A(EXP)'

NEW YORK--()--Fitch Ratings has assigned Rockwell Collins, Inc.'s (COL) proposed $1.1 billion floating and fixed senior unsecured notes 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 quarter of 2014, and COL plans to fund the acquisition cost entirely with debt. Fitch's ratings will cover approximately $2.5 billion of long- and short-term borrowings giving effect to the expected issuance of new senior unsecured notes and 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 leverage will 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 significant increase in COL's leverage due to the acquisition.

KEY RATING DRIVERS

Fitch's primary credit concern is the timing of COL's return to stronger financial metrics, including the risk of sequestration and of a weaker economy 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 repurchases and dividends.

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 also concerned with the integration risk of the acquisition as COL is not experienced in integrating large scale operations due to the bolt-on acquisition strategy followed by the company in the recent past. However, Fitch expects integration challenges could be mitigated by the treatment of Arinc as a stand-alone 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 deficit and potential cash deployment actions towards acquisitions. Fitch does not expect COL to make other large acquisitions in the near future, but small scale acquisitions are possible.

Fitch estimates the issuance of debt associated with the acquisition will increase COL's debt/EBITDA to slightly above 2.0x immediately following the 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 on-going operations.

Fitch expects that COL will repay acquisition-related short-term borrowings 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). Fitch also 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 expects annual 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 margin commercial sales, an expected diversification of revenue sources from the Arinc acquisition, a balanced portfolio within aerospace and defense markets, high 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 plane communications. The acquisition could enable COL to develop new products or solutions by combining Arinc's ground networks with its avionics products. Additionally, Arinc's revenues are highly subscription based, diversifying COL's revenue sources and providing higher stability to its revenue stream.

RATING SENSITIVITIES

Fitch does not expect to take positive rating actions over the next several years as COL will gradually reduce its leverage. Fitch may take a negative rating action if COL's debt reduction pace is significantly slower than 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.

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 Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811444

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA, +1 212-908-0280
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Craig Fraser, +1 212-908-0310
Managing Director
or
Committee Chairperson
James Rizzo, +1 212-908-0548
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA, +1 212-908-0280
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Craig Fraser, +1 212-908-0310
Managing Director
or
Committee Chairperson
James Rizzo, +1 212-908-0548
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com