Fitch Places Exelis Inc. on Rating Watch Negative Following Acquisition Announcement

NEW YORK--()--Fitch Ratings has placed the Issuer Default Ratings (IDR), senior unsecured facilities, and senior unsecured notes for Exelis Inc. (XLS) on Rating Watch Negative. The rating action is driven by the Feb. 6 announcement that Harris Corporation (HRS, not rated by Fitch) will acquire XLS in a cash and stock transaction valued at approximately $4.75 billion. The rating action covers $650 million of unsecured indebtedness and $500 million of commercial paper program debt. A complete list of ratings is provided at the end of this release.

The definitive agreement between HRS and XLS calls for HRS to acquire XLS for $23.75 per share, with the shareholders receiving $16.625 in cash and 0.1025 of HRS shares per each XLS share. The transaction will create a well-diversified Aerospace & Defense company with pro forma $8.2 billion revenues and approximately $1.6 billion EBITDA. The transaction was approved by the Board of Directors of the both companies; however, it still requires approval from regulatory authorities and XLS shareholders. The acquisition is expected to close in June of 2015. Fitch expects the transaction to receive approval from antitrust authorities with little need for divestment.

KEY RATING DRIVERS

The Rating Watch Negative reflects Fitch's expectation that HRS' post acquisition credit profile may not be consistent with XLS' current 'BBB+' ratings. HRS expects its net leverage (net debt / EBITDA) will increase to approximately 2.9x following the acquisition with the definite plan to reduce its leverage to approximately 1.5x over the next three years. Additionally, The Rating Watch Negative reflects Fitch's concerns regarding integration risks and HRS' ability to realize the savings and additional sales from the identified synergies.

In XLS' indenture governing senior unsecured notes, a change of control triggering event provision requires XLS to offer to purchase the notes at 101% if there is a change of control and if each rating agency, including Fitch, rates the notes below investment grade during the 60-day period upon the announcement of the event.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--There is a possibility of a downgrade if the acquisition by HRS is completed and will depend on the HRS's final capital structure and the timing of expected deleveraging.

--Fitch expects standalone XLS's annual pension contributions will be more than 40% of the company's adjusted FFO and may limit its financial flexibility.

--FCF is expected to recover and fluctuate in the range of $ 150 million to $200 million in 2015 and beyond.

--Exelis' future FFO adjusted leverage will be in the range of 2.9x to 3.1x for the next several years, somewhat high for the 'BBB+' rating, but offset by the strength of other credit metrics.

RATING SENSITIVITIES

A completion of the HRS acquisition according to the current terms may lead to a downgrade of XLS' ratings.

If the transaction is not completed, Fitch could affirm the ratings. With the likelihood of a substantial leverage increase as a result of the HRS acquisition, Fitch does not currently expect to take a positive action on XLS' ratings in the near to intermediate term if the transaction is completed.

The following XLS' ratings have been placed on Rating Watch Negative:

--IDR at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Senior unsecured revolving credit facility at 'BBB+';

--Short Term IDR at 'F2';

--Commercial paper at 'F2'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979416

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
David Petu
Director
+1-212-908-0280
Fitch Ratings, Inc.
33 Whitehall Street,
New York, NY 10004
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Philip Smyth
Senior Director
+1-212-908-0531
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
David Petu
Director
+1-212-908-0280
Fitch Ratings, Inc.
33 Whitehall Street,
New York, NY 10004
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Philip Smyth
Senior Director
+1-212-908-0531
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com