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Moody's: US defense contractors would struggle to withstand payment disruptions

Global Credit Research - 30 Sep 2013

New York, September 30, 2013 -- Defense contractors are only marginally better prepared to withstand US government payment disruptions now than they were during the last debt-ceiling crisis, despite having had a taste of sequestration, Moody's Investors Service says in a new report. The liquidity of Moody's-rated defense contractors has improved only slightly in the meantime.

"Any delay in government payments would quickly weaken defense contractors' liquidity," says Vice President -- Senior Analyst, Bruce Herskovics in "Liquidity Profiles Only Slightly Improved from Previous Debt-Ceiling Crisis." "Although diversification away from declining US military sales and higher backstop liquidity arrangements have modestly improved companies' liquidity profiles, the risks remain elevated, particularly in the event of a government shutdown wherein no payments are made for a protracted period."

Moody's measures the vulnerability of defense contractors to disruptions in government payments via its Defense Contractor Liquidity Index, which it developed during the last debt-ceiling crisis. The index is based on calculations of a company's current sources of liquidity relative to estimated annual US government-related revenue. The new report provides a list of companies' scores.

The companies that are most vulnerable to payment disruptions are generally mid- to low-tier contractors with elevated leverage, as well as some investment-grade firms with very large US government revenue streams, notes Senior Vice President Russell Solomon. "Our index shows that four out of five Caa-rated companies and four out of 21 investment-grade issuers would struggle to withstand anything more than a short-lived cessation of collections under US government billings."

Liquidity for certain prime defense contractors and a mix of smaller services companies has shown the most improvement since 2011, according to Moody's. Though still heavily dependent on the US government, Boeing Co. and General Dynamics Corp., for example, have both benefited from increased diversification into the commercial aerospace sector, and in addition have retained higher levels of cash. Rockwell Collins Inc., Raytheon Co., L-3 Communications Corp., Scitor Corp., ManTech International Corp. and Triumph Group Inc. also all have improved liquidity scores.

Contractors more exposed, and that have shown index score declines since 2011, include Lockheed Martin Corp., TASC, Inc. and Alliant Techsystems Inc.

Moody's research subscribers can access this report at https://www.moodys.com/research/The-US-Government-Shutdown-and-Debt-Limit--PBC_158933.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Bruce Herskovics
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Russell Solomon
Senior Vice President
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: US defense contractors would struggle to withstand payment disruptions
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