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Rating Action:

Moody's assigns Baa3 ratings to proposed senior unsecured notes of Leidos, Inc

07 May 2020

Approximately $1.25 billion of debt affected

New York, May 07, 2020 -- Moody's Investors Service assigned Baa3 ratings to the planned $1.25 billion of senior unsecured notes to be issued by Leidos, Inc ("Leidos" or the "company"), the proceeds of which will be used to repay a $1.25 billion 364-day bridge loan that partially funded the company's $1.65 billion acquisition of Dynetics, Inc. in January 2020. Beyond the Dynetics, Inc. acquisition, Leidos' $1 billion acquisition of L3Harris' Security Detection and Automation ("L3ADA") business, which just closed, was funded through a two-year term loan.

"The notes issuance partially refinances $2.7 billion of maturing debt over the next 24 months, and we anticipate the balance ($1.45 billion) will be repaid with free cash flows, enabling Leidos to meet its 3x post-acquisition de-leveraging target," says Bruce Herskovics, Moody's lead analyst for Leidos.

"Notwithstanding government facility access issues that COVID-19 has temporarily imposed on some of Leidos' service contracts, we anticipate the de-leveraging target will be met with relative ease following a banner year for bookings that should permit organic revenue growth of 7%-8% near term," added Herskovics.

The spread of the coronavirus outbreak, the deteriorating global economic outlook, very low and volatile oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The commercial aerospace and defense sectors have been adversely affected by the shock given indirect exposure to the severely pressured airline industry and sensitivity to consumer demand and sentiment, and to some degree also to facilities access during the lockdown period. Leidos' revenue dependence on defense and health programs and, to a lesser degree, on airport-related technology/capital spending projects has left it exposed to shifting market sentiment within these unprecedented operating conditions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's actions reflect the impact on Leidos of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

RATINGS RATIONALE

The Baa3 ratings for Leidos' senior unsecured debt continues to reflect the company's position as the largest pure-play defense services contractor with scale to prime large contracts and with noteworthy customer breadth spanning foreign governments, US federal agencies, and commercial health markets. Beyond a good contract execution record, leading large service procurements requires financial capacity to meet long-term performance obligations, depth of human resources and a good understanding of how information technology change will advance customer efficiency in the future. Backlog exceeded $28 billion at March 31, 2020 and will likely climb in coming quarters based on recent awards.

Credit metrics will be somewhat stretched for the rating level in 2020 following the Dynetics and L3ADA acquisitions, but Leidos had built up financial capacity for these and they will expand the addressable market and bring capabilities that should enhance the company's return profile. Commensurate with Leidos' measured financial policies, the company plans to direct free cash flow toward debt reduction across 2020 and 2021. Moody's anticipates pro forma leverage will decline from around 3.9x to about 3.0x in 2021. Moody's anticipates that the $450 million bonds due December 2020 and most of the $1.2 billion two-year bridge loan will be repaid through internally generated cash flows. Moody's anticipates that Leidos will generate free cash of $675 million in 2020 and around $800 million in 2021. At April 3, 2020, Leidos held cash of $445 million and there were no borrowings under the company's $750 million revolving credit facility.

The notes to be issued will be guaranteed by direct parent Leidos Holdings, Inc., thereby keeping all the debts of Leidos and Leidos Holdings, Inc. pari passu with respect to each other, on a senior unsecured basis. Moody's expects the $1.25 billion notes issuance will be comprised of two to three different maturity tranches ranging from five to 12 years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Downward ratings pressure would follow contract performance issues or significant backlog declines, aggressive shareholder return initiatives, leverage above 3.5x on a sustained basis, and/or a diminished liquidity profile such as from a lack of progress toward reducing short-dated debt maturities. Upward ratings momentum would depend on sustained high backlog, asset returns above 7%, free cash flow-to-debt greater than 15%, and strong liquidity with cash-to-sales approaching 10%.

Headquartered in Reston, Virginia, Leidos Holdings, Inc. is a defense/intelligence engineering and health services provider. Revenues for the twelve months ended April 3, 2020 were approximately $11.3 billion.

The following rating actions were taken:

Assignments:

..Issuer: Leidos, Inc

....Senior Unsecured Regular Bond/Debenture, Assigned Baa3

The principal methodology used in this rating was Aerospace and Defense Industry published in March 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108840. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued [with/with no] amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Russell Solomon
Associate Managing Director
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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