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Rating Action:

Moody's assigns Ba2 rating to SAIC's new bank credit facility

11 Oct 2018

Approximately $2.5 billion of debt assigned rating

New York, October 11, 2018 -- Moody's Investors Service has assigned a Ba2 rating to the planned senior secured bank credit facility of Science Applications International Corp. ("SAIC" or the "company"). SAIC's existing debt ratings, the speculative grade liquidity rating of SGL-2, and the negative rating outlook are unaffected.

Proceeds will refinance the debt of SAIC and of Engility Corporation. ("Engility"), as SAIC is in the process of acquiring Engility's parent. That merger is anticipated to be completed before year end. Moody's will withdraw all ratings of Engility, once Engility's outstanding debts have been repaid.

RATINGS RATIONALE

SAIC's ratings, including the Ba2 corporate family rating, reflect broad agency coverage and diversity of service revenue that will follow the combination, with about 23,000 employees and 69% of them holding a security clearance. Beyond the US Department of Defense, SAIC's contracts will span multiple agencies of the intelligence community, space and federal civilian agencies.

Acquiring Engility will give SAIC a greater degree of revenue from direct labor rather than from materials and subcontractors, which should enhance margin. Further, cost synergies could by the end of 2021 (three years after the merger), result in an EBITDA margin as high as 10%, versus 8% recently. SAIC will increase the portion of revenues from cost-based contracts, which makes achieving cost-synergies also beneficial for price competitiveness purposes.

A favorable US defense budgetary environment expected near term affords latitude to emphasize quality of the business integration which will be important to achieving revenue synergies later, such as bidding for larger, more complex service projects.

The negative rating outlook recognizes limited room for execution error over the initial 12 to 18 months following the merger. Pro-forma beginning financial leverage at 4x is high compared to other peers at the same rating level, and SAIC faces a significant integration project ahead.

Further, the stock for stock acquisition, may encourage SAIC to ultimately prepay very little debt, with bolt-on M&A and alternate free cash flow uses possible. The planned bank facility's amortization schedule requires only $75 million across the first two years.

The negative outlook also factors the potential upcoming termination of the US Marine Corps' amphibious assault vehicle upgrade program, on which SAIC is lead contractor, following the recently issued 90-day stop work order. Moody's viewed the program as an important opportunity for SAIC to build performance credentials with a vehicle program of significance, which has been a strategic objective. In Moody's view the vehicle platform integration business would give SAIC stronger backlog with potential for access to longer term revenue from defense procurement accounts, rather than the typically shorter-term operations/maintenance accounts available to most of the service contractors.

SAIC's only acquisition since becoming an independent company occurred with the 2015 purchase of Scitor. Scitor was a long-established and successful, intelligence agency services specialist, but one-third the size of Engility, and became an operating segment of SAIC after the acquisition. In contrast, Engility became an independent company only in 2012 as a spin-off from L-3 Technologies. Engility revenues and market share contracted since its own 2015 transformational merger with TASC, a merger which roughly doubled revenue. Instead of keeping Engility separate, SAIC will immediately integrate Engility's broad portfolio across its three operating segments.

As we expect US defense service outlay growth of mid-single digit percentage near-term, stabilization of the rating outlook will be sensitive to at least a low single digit percent revenue growth for SAIC, with a similar backlog gain.

Moody's will monitor SAIC's integration spending rate, the likelihood of de-leveraging to mid-3x within the first year and achieving annual run rate free cash flow, after one-time costs, of $200 million. As one-time costs subside, the annual free cash flow run rate of the combined entity could exceed $300 million by the end of the second year.

The ratings could be upgraded with consistently higher revenues and evidence of ability to prime larger, more prominent contracts. EBITDA margin above 10%, free cash flow to debt in the high teen percentage range (e.g. over $400 million per annum), and sustained good liquidity would be important elements in any potential upgrade.

The rating could be downgraded with expectations of debt to EBITDA above 4x, significant negative contract developments, weakened liquidity or indication of disruptions in the merger integration, or inability to stabilize and then growth Engility's revenue on a profitable basis.

The Ba2 rating assigned to the planned senior secured bank credit facility, on par with the CFR, reflects preponderance of secured debt within the liability structure.

Assignments:

..Issuer: Science Applications International Corp

....Senior Secured Bank Credit Facility, Assigned Ba2 (LGD3)

Science Applications International Corporation is a provider of technical, engineering and enterprise information technology services primarily to the U.S. government, including the Department of Defense and federal civilian agencies. The company was spunoff from Leidos Holdings, Inc. on September 27, 2013. Annual revenues, pro forma for the pending acquisition of Engility Holdings Corp, are about $6.4 billion.

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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