KEY RATING DRIVERS
ATK expects to receive a dividend from the spin-off in the range of
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
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
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
The spin-off will allow the
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'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--'Treatment and Notching of Hybrids in Corporates and REIT Credit Analysis' (
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
David Petu, CFA, +1 212-908-0280
Craig Fraser, +1 212-908-0310
Glen Grabelsky, +1 212-908-0577
Source: Fitch Ratings
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