NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Orbital ATK Inc.'s (OA) Issuer Default Rating (IDR) at 'BB+', senior secured facilities at 'BBB-/RR1' and senior unsecured notes at 'BB+/RR4'. Fitch's ratings currently cover approximately $1.5 billion long-term debt. The Rating Outlook is Stable. A full list of rating actions appears at the end of this release.
KEY RATING DRIVERS
The ratings and Stable Outlook are supported by OA's solid margins and strong cash flows, good product/program diversification, successful integration of operations following the merger of Alliant Techsystems Inc. (ATK) and Orbital Sciences Corporation (ORB) which was completed on Feb. 9, 2015, and OA's role as a sole source provider for many of its products. The company has de-levered following the acquisition, generated strong operating cash flows and improved its operating margins. The ratings are also supported by adequate financial metrics for the ratings and adequate financial flexibility.
Fitch estimates OA's credit metrics will improve over the next two years driven by modest revenue growth; continued realization of the merger synergies resulting in operating margin improvements and additional revenue opportunities; and scheduled amortization of the company's term loan. Fitch expects OA's leverage and adjusted leverage will decline to 2.4x and 3.2x, respectively, by the end of 2016 down from 2.8x and 3.7x from the prior year, respectively. Other metrics such as free cash flow (FCF) margin (4.6%) and funds from operations (FFO) fixed charge coverage (4x) are solid for the ratings.
Fitch is concerned by rising competition in some space sectors; cash deployment strategies that include increasing dividends and sizable share repurchases as Fitch expects the company will deploy 80% to 90% of its pre-dividend FCF toward shareholders; and significant exposure to the U.S. Government, which accounted for approximately 70% of total revenues in 2015.
Fitch also remains concerned with the $763 million underfunded status of OA's defined pension plans (74% funded at the end of 2015), even though the deficit was reduced from $850 million at the end of fiscal year ending March 31, 2015. At the end of 2015, the company's pension obligations totaled approximately $3 billion. Other post-employment benefit (OPEB) obligations totaled $114 million and were $54 million underfunded. OA contributed $74 million to its defined benefit plans in the last nine months of 2015. The company expects to make approximately $40 million in contributions during 2016.
Fitch expects pension contributions to be a moderate part of OA's cash distribution policy in the near-to-intermediate future, and the net cash impact of the pension contributions will not be material after giving effect to government reimbursements. OA's status as a defense contractor mitigates some of the risks associated with its pension obligations. A significant portion of OA's pension contributions are recoverable through government contracts because they qualify as allowable costs under government Cost Accounting Standards.
The notching up of the senior secured credit facility by one rating level from the IDR of 'BB+' to 'BBB-/RR1' is supported by the coverage provided by OA's tangible assets and operating EBITDA compared to the fully drawn facility. The collateral for the facility includes substantially all of OA's assets.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for OA include:
--Low single digit revenue growth;
--Steady EBITDA margins in the range of 13% to 14%;
--Combined net share repurchases and dividend payments in the range of 80% to 90% of pre-dividend FCF;
--Debt repayment will be limited to the scheduled term loan amortization;
--The company will generate approximately $300 million FCF annually and FCF margin will remain within the range of 4% to 5%;
--Capital expenditures will fluctuate in the range of 4.25% to 4.75% of revenues, annually;
--OA will not make acquisitions in the near future;
--Pension contributions will be a small portion of the company's cash deployment and will be less than 10% of FFO.
RATING SENSITIVITIES
Fitch may consider a positive rating action if the company's leverage and adjusted leverage improves and remains below 2.25x and 3.0x for a sustained period of time. Fitch may also consider a positive rating action if the company's FFO adjusted leverage improves and remains below 3.5x. A positive rating action would also depend on clarity of the company's future financial policies and its commitment to maintaining investment grade ratings.
Fitch may take a negative rating action if the company's leverage and adjusted leverage deteriorates and remain above 3.0x and 3.5x for a sustained period of time. Fitch may also consider a negative rating action if the company's FFO adjusted leverage deteriorates and remains above 4.25x or if FCF margin declines and remains below 3%. Additionally, a negative rating action may be considered if the company engages in aggressive debt funded acquisitions or share repurchases, or if it is a subject to unexpected material litigation related to its space programs.
LIQUIDITY
At Dec. 31, 2015, OA had a liquidity position of $1 billion, consisting of $104 million of cash and $854 million of net revolver availability after taking into account the company's $146 million letters of credit outstanding. The company has a favorable debt maturity schedule with the term loan A's mandatory payments comprising approximately $40 million annually. Fitch expects liquidity to increase to above $1 billion by the end of fiscal 2017 and views liquidity to be adequate for the ratings.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Orbital ATK Inc.
--IDR at 'BB+';
--Senior secured credit facilities at 'BBB-/RR1';
--Senior unsecured notes at 'BB+/RR4'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments:
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Date of Relevant Rating Committee: April 13, 2016.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002521
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002521
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.