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I AGREE
24 Jan 2011
Approximately $2.425 billion of rated debt affected
New York, January 24, 2011 -- Moody's Investors Service has assigned new debt ratings to Huntington
Ingalls Industries, Inc. ("Huntington Ingalls")
including: Ba2 corporate family and probability of default ratings,
Baa3 senior secured bank credit facility rating, Ba3 senior unsecured
bond rating, and a speculative grade liquidity rating of SGL-2.
The rating outlook is stable.
The Ba2 CFR reflects Huntington Ingalls' established position as
a critical shipbuilding contractor to the U.S. Navy,
with stable revenues although a moderate return on assets of about 2%
to 3% (net income to average assets, Moody's adjusted).
We expect 2011 debt to EBITDA of about 4.0 times, which would
be consistent with the Ba2 rating level. We also anticipate operating
margins should gradually improve over time which should produce declining
financial leverage.
Huntington Ingalls is a sole builder of U.S. Navy aircraft
carriers, is one of two contractors for U.S. Navy
submarines, and holds a strong position as a surface warship contractor.
We anticipate the Navy continuing to award contracts at a pace that basically
maintains the company's current backlog level, which provides
good visibility of forward revenues. Assuming costs in line with
recent levels (excluding charges), the rating envisions EBIT margin
improving to the mid-single digit percentage range. This
gradually improving EBIT margin should lower leverage over time.
Longer term, U.S. fiscal deficits could pressure ship
building outlays but we do not see that as a risk to intermediate-term
revenues.
We do not anticipate Gulf Coast segment margins will approach those of
the Newport News segment for some time, even with the planned closure
of the Avondale, Louisiana yard. Although charges related
to the Avondale closure and problems on amphibious ship contracts have
likely concluded, the rating acknowledges that completing vessels
LPD 23 and LPD 25—as Avondale closes—could prove a challenge.
Operational improvements made in recent periods should permit better performance
on future surface combatant ship contracts, especially the DDG-51
program re-start. Huntington Ingalls appears reasonably
positioned to receive a meaningful portion of the U.S. Navy's
DDG-51 ship construction contracts, which would be handled
by the Gulf Coast segment.
The speculative grade liquidity rating of SGL-2 reflects a good
liquidity profile, which adds support to the Ba2 CFR. A beginning
cash balance of about $300 million and no beginning borrowing expected
on the $650 million five-year revolver, provide a
comfortable level of available liquidity. Near-term maturities
will be limited and we expect the company should be cash flow generative
over 2011. The SGL-2 anticipates adequate headroom under
the first lien credit facility's financial ratio covenant tests.
Upward rating momentum would develop with backlog continuing at current
levels and steadily improving Gulf Coast operations, leading to
an expectation of EBIT margin in the upper single digit percentage range
(8% to 9%). At this margin level, assuming
a balanced financial policy, leverage metrics would likely improve
to include debt to EBITDA of 3.0 times and free cash flow to debt
above 10%. Expectation of a good liquidity profile would
as well accompany an upgrade.
Downward rating momentum would develop if backlog were to materially weaken
or if we were to expect return on assets sustained below 1%.
Debt to EBITDA exceeding 5.0 times, or a weakening liquidity
profile could also cause a ratings downgrade.
Ratings assigned, subject to review of final documentation:
$650 million senior secured revolving credit due 2016, Baa3
LGD2, 21%
$600 million senior secured term loan B due 2016, Baa3 LGD2,
21%
$575 million senior unsecured notes due 2018, Ba3 LGD5,
74%
$600 million senior unsecured notes due 2021, Ba3 LGD5,
74%
Speculative grade liquidity, SGL-2
When Huntington Ingalls' separation from Northrop Grumman Corporation
occurs, the remaining $22 million of 4.55%
Gulf Opportunity Zone Industrial Revenue Bonds due 2028 ("GoZone
Bonds") (Baa1) will become an obligation of Huntington Ingalls'
main operating company. At that time, the GoZone Bonds will
no longer benefit from the credit support of Northrop Grumman Corporation
(Baa1). We therefore expect to lower the rating of the GoZone Bonds
to Ba3 LGD5, 74% from Baa1 following the spin-off.
The principal methodologies used in this rating were Global Aerospace
and Defense published in June 2010, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Huntington Ingalls Industries, Inc., after it is spun
off of Northrop Grumman Corporation, will be an independent company.
Huntington Ingalls provides full service design, engineering,
construction, and lifecycle support of major surface ship programs
for the U.S. Navy. We estimate revenues in 2010 were
approximately $6.5 billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, and parties not involved in the
ratings, public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
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independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Bruce Herskovics
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns Ba2 CFR to Huntington Ingalls
No Related Data.
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