NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Alliant Techsystems, Inc.'s (ATK) Issuer Default Rating (IDR) at 'BB+' following the announcement of a plan to spin off the company's Sporting Group and then merge with Orbital Sciences Corporation (Orbital). Fitch has also affirmed the ratings for ATK's senior secured facilities and unsecured indebtedness. The Rating Outlook is Stable. Fitch's ratings currently cover approximately $2.1 long term debt. The company's full rating list follows at the end of this release.
KEY RATING DRIVERS
On April 29, 2014, ATK announced a plan to spin off its Sporting Group into a standalone company. Fitch estimates the Sporting Group would account for more than 40% of ATK's pre-spinoff pro-forma 2014 revenues. None of ATK's existing debt will be assumed by the Sporting Group. The spin-off will immediately be followed by a tax-free, stock merger between ATK's remaining business units and Orbital. The merger will form a pure Aerospace and Defense company named Orbital ATK which will generate approximately $4.5 billion and $600 million in revenues and EBITDA, respectively. Fitch believes the spin-off and merger will be neutral to ATK's current ratings.
ATK expects to receive a dividend from the spin-off in the range of $300 million to $350 million. The company expects to use proceeds to reduce ATK's current indebtedness. Orbital ATK is expected to assume approximately $1.7 billion of ATK's gross long term debt after repaying Orbital's existing senior secured facilities. Fitch estimates the new company will have approximately 2.9x leverage (gross debt/EBITDA), which is in line with Fitch's original expectations for ATK's year-end leverage. Fitch expects other financial metrics of Orbital ATK to be commensurate with ATK's current ratings. Both transactions should be completed by the end of 2014, subject to approvals by regulatory authorities and the shareholders of both companies.
The merger will unite two major players in the space and aviation systems sectors, and it should present significant synergy opportunities through vertical integration between ATK's heritage propulsion systems and space components operations and Orbital's business units. Orbital ATK will have a significant exposure to the U.S. Government; however, its programs will be highly diversified with sales to NASA, DoD and commercial aerospace customers.
In addition to adequate leverage and liquidity, the ratings and Stable outlook are supported by both ATK's and Orbital's solid margins and strong cash flows, good product/program diversification, significant cost saving synergy opportunities from the merger, and Orbital ATK's role as a sole source provider for many of its products.
Fitch is concerned with merger integration; continued uncertainty surrounding core defense spending after fiscal 2015; 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; lower modernization activities at Lake City; and rising competition is some space sectors. Additionally, the spin-off and subsequent merger will significantly increase the company's exposure to the U.S. Government which should account for more than 75% of total revenues.
Fitch is also concerned with the underfunded status of ATK's legacy pension (77% funded as of the end of fiscal 2013). Fitch expects Orbital ATK will retain the majority of ATK's pension liabilities and will continue making significant pension plan cash contributions. Orbital's defined benefit pension plans are fully funded and are not material. Fitch will monitor Orbital ATK's cash deployment strategies, but Fitch expects the company's share repurchases and dividends will be moderate. Fitch anticipates Orbital ATK's acquisition activities will also be moderate. Fitch expects ATK's FCF to be in the $225 to $275 million range though calendar 2014.
The spin-off will allow the Sporting Group to focus on its core competencies and will have a more focused strategy. ATK announced that some of the current executive team will be taking leading management roles in the standalone Sporting group. The sporting group is expected to generate approximately $360 million EBITDA at the end of 2014.
The Sporting Group will have a strong position within the sporting goods industry as a standalone company driven by major 2013 acquisitions. Savage offered the Sporting Group 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 diversified the group's portfolio of sporting goods accessories and sports optics while providing an entry to the performance and safety eyewear market.
Fitch does not expect to take positive rating actions over the next several years while Orbital ATK works through the consolidation and integration processes after the merger, and also while the company clarifies some elements of its post-merger strategic and financial policies. Fitch may take a negative rating action if Orbital ATK's leverage increases to the 3.1x - 3.3x range. A negative rating action could also be expected if the company completes a debt funded acquisition, encounters integration problems, or does not achieve the planned merger synergies.
Fitch affirms ATK and its debt as follows:
--Long-term IDR at 'BB+';
--Senior secured bank facility at 'BBB-'.
--Senior unsecured Notes at 'BB+'
--Convertible senior subordinated notes at 'BB';
--Senior subordinated notes at 'BB'.
The Rating Outlook is Stable.
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:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis