NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Huntington Ingalls Industries, Inc.'s (HII) proposed senior unsecured notes 'BB'. HII plans to issue $600 million of seven-year notes that will rank equally with the company's existing unsecured notes.
Proceeds will be used to fund a tender for HII's outstanding 6.875 % senior unsecured notes due 2018. HII's total debt will remain largely unchanged after the transactions, and Fitch's ratings will cover approximately $1.8 billion of outstanding debt after giving effect to the new issuance and the expected repayment of the existing notes.
HII's existing ratings are listed at the end of this release. The Rating Outlook is Positive. The indenture governing the proposed notes will have significantly different restrictive covenants from those governing HII's existing $600 million 7.125% senior unsecured notes due 2021 and the credit facilities. The restrictive covenants for the new notes will contain a change of control provision, limitation on liens and certain other customary limitations. However, unlike the covenants in the existing indenture, they will not limit the company's ability to raise additional secured debt or pay dividends. Additionally, the new notes will not be subject to interest coverage and leverage ratios. Fitch views the change in covenants as credit neutral for HII.
KEY RATING DRIVERS
HII has adequate credit metrics for the current ratings which are also supported by a strong liquidity position, solid and improving margins, and a large backlog. As of Sept. 30, 2014, HII had liquidity of $1.4 billion, including $769 million in cash and $619 million of availability under its $650 million domestic credit revolving facility, after giving effect to $31 million of outstanding letters of credit. The ratings are also supported by the strategic importance of HII's products and the company's significant role in the U.S. Navy's 30-year shipbuilding plan released in July 2014. HII is a sole source manufacturer of more than 70% of its revenues.
Fitch expects HII will continue reducing its leverage over the next several years due to improving operating results and an anticipated amortization of the senior secured term loan. The company has posted noticeable improvements in its EBITDA and FCF margins over the past two years driven by improving operations in its Ingalls business segment. Fitch projects HII's EBITDA margins will be above 13% in 2014, up from 11.2% and 8.4% in 2013 and 2012, respectively. For the last 12 months (LTM) ending Sept 30, 2014, the company had gross leverage of 1.8x, down from 2.7x and 3.2x at the end of 2013 and 2012, respectively.
Fitch's rating concerns include the company's exposure to risks to core defense spending after fiscal 2015 and to HII's revenue concentration with the U.S. Navy and Coast Guard. HII generates nearly all of its revenues from the U.S. government, exposing the company to changes in plans regarding the needs of the Department of Defense (DoD) and the Department of Homeland Security. Fitch is also concerned by the company's program execution risks and the high percentage of the workforce that is unionized.
HII generated approximately $606 million of cash flow from operating activities during the last 12 months ended (LTM) Sept. 30, 2014, up significantly from $236 million at the end of 2013. HII's FCF totaled $421 million during the LTM ended Sept. 30, 2014, up from $72 million at the end of 2013 primarily due to better operating results and lower working capital requirements. Fitch expects HII's FCF generation to continue improve beyond 2014. HII focuses its cash deployment on bolt on acquisitions, capital expenditures, dividends, and pension contributions.
Fitch may consider a positive rating action if HII continues improving its operating margins and decreases its current leverage by either a reduction in debt or an anticipated increase in EBITDA. Any positive rating action will also be predicated on improvements in HII's FFO based credit metrics and FCF generation. A negative rating action is not likely in the near future, but would be considered should the company's leverage (debt to EBITDA) increase to above approximately 3.6x-3.8x; or if defense spending cuts have more significant impact on the company's earnings and FCF than currently anticipated.
Fitch currently rates HII as follows:
--Senior secured bank facilities 'BBB+';
--Senior unsecured debt 'BB'.
The Rating Outlook is Positive.
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', May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage