NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Raytheon Company's (RTN) proposed senior unsecured notes 'A-'. RTN plans to issue $600 million of senior unsecured notes that will rank equally with the company's existing unsecured notes. The maturity of the notes is expected to range between 10 and thirty years.
RTN will utilize the funds to make a discretionary contribution to its qualified U.S. pension plans. As of Dec. 31, 2013, RTN had a sizable pension deficit of $3.3 billion (86% funded), however Fitch expects the funded status of the pension plan will likely be pressured in 2014. Interest rates have declined by approximately 50 to 60 bps since the end of 2013, putting pressure on the discount rate and threatening to reverse some of the improvements in the funded status gained in 2013. Offsetting this likely deterioration in the funding position is the beneficial impact on pension cash flows through 2017 resulting from the passage of the Highway and Transportation Funding Act of 2014 (HAFTA).
RTN's existing ratings are listed at the end of this release. The Rating Outlook is Stable. Fitch's ratings on RTN cover approximately $5.3 billion of long-term debt including the proposed $600 million of senior unsecured notes. The indenture governing the proposed notes is unchanged from those governing the company's other existing senior unsecured notes.
KEY RATING DRIVERS
RTN's ratings are supported by the company's competitive position in the defense industry; good product diversification; an increasing portion of revenues derived from international sales; strong liquidity; and large backlog. The company's product portfolio is highly diverse by program, diminishing the risk of large program cuts by the U.S. Department of Defense (DoD). Additionally, the majority of the company's product portfolio is well aligned with the U.S. DoD's priorities.
The ratings and Outlook are also supported by strong cash generation and effective cost management which resulted in margin improvements over the past three years despite annual revenue declines since 2010. Fitch's concern regarding the large pension deficit and corresponding funding requirements is mitigated by the impact of HAFTA mentioned above.
Concerns include RTN's exposure to potential declines in core U.S. defense spending in fiscal 2016 driven by sequestration. The concern is somewhat mitigated by rising international sales and by RTN's demonstrated ability to reduce costs to manage lower revenue scenarios.
Fitch's additional concerns include cash deployment strategies that include increasing dividends and sizable share repurchases, and the possibility of a sizable acquisition, although the company has not engaged in major acquisition activities over the past five years. RTN recently closed a moderately sized acquisition of Blackbird Technologies for approximately $420 million.
Fitch expects RTN's credit metrics will deteriorate with the issuance of the proposed $600 million of senior unsecured notes, and any further material weakening of the metrics could potentially pressure the ratings. Fitch estimates the company's leverage (debt to EBITDA) will deteriorate to approximately 1.5x at the end of 2014 up from 1.4x at the end of 2013. Similarly, FFO adjusted leverage is expected to deteriorate to 2.8x, up from 2.0x at the end of 2013. Fitch notes RTN has elevated FFO adjusted leverage for the ratings due to high required and discretionary pension contributions over the past years.
Fitch would consider a negative rating action if the company's leverage (debt / EBITDA) or FFO adjusted leverage deteriorated and remained within the ranges of 1.5x - 1.7x and 2.7x - 2.9x, respectively, driven by unsuccessful attempts to reduce costs in line with revenue reductions, or aggressive debt funded acquisitions or share repurchases.
Fitch does not an anticipate an upgrade in RTN's ratings because of the current uncertainty in the defense spending outlook and Fitch's expectation that the company's liquidity will decline due to cash deployment to shareholders.
Fitch currently rates RTN as follows:
--Issuer Default Rating (IDR) 'A-';
--Senior unsecured debt 'A-';
--Bank facilities 'A-';
--Short-term IDR 'F2';
--Commercial paper programs 'F2'.
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' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage