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Rating Action:

Moody's assigns Ba2 CFR to Huntington Ingalls

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.

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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.

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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.

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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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