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18 May 2010
Outlook stable on $4.15 billion of rated debt
New York, May 18, 2010 -- Moody's Investors Service upgraded the ratings of L-3 Communications
to the investment grade category and assigned a Baa3 rating to L-3
Communications Corporation's ("L-3 Corp.")
new $800 million issue of senior unsecured notes. In accordance
with prior rating commentary, the rating on L-3 Corp.'s
existing senior unsecured notes due 2019 was lowered to Baa3 from Baa2
due to the evolution of the company's capital structure to include a greater
weighting of senior unsecured obligations. At the same time,
ratings on L-3 Communications Holdings, Inc's. (L-3)
and L-3 Corp.'s subordinated obligations were raised
to Ba1 from Ba2. The outlook is stable.
The Baa3 senior rating recognizes the cumulative benefits of several developments.
L-3's credit metrics have steadily progressed and improved
following its debt reduction in 2009. In combination with sustained
revenues, earnings and prospective contributions from the acquisition
of Insight Technology ("Insight"), leverage has declined,
interest coverage has increased, and capacity has continued for
substantial free cash flow generation. Moody's also views
the shift in the composition of L-3's debt with the refinancing
of the subordinated instruments with senior unsecured debt as an initial
but significant step in transitioning towards a capital structure more
reflective of investment grade credits and less vulnerable to being extensively
levered. In addition, although Insight was L-3's
largest transaction for several years, management has both exhibited
and expressed a preference towards smaller and medium sized deals,
diminishing prospective integration and re-leveraging concerns.
Furthermore, although the company's funded debt will not change
as a result of the note issuance and planned redemption of subordinated
debt of an equal amount, interest expense going forward should decline
as the new notes are expected to carry a lower coupon than the subordinated
obligations. L-3's debt maturity profile will lengthen
as the new notes will have a ten year maturity compared to the 2013 and
2014 maturities of the notes being redeemed. Still, L-3's
capital structure could change further depending upon the outcome,
or any associated refinancing, of the 2011 put/call of its CODES
notes and its maturity profile will have a certain lumpiness given the
magnitude of several large financings.
Senior unsecured instruments will become a higher proportion of total
debt while the share which subordinated obligations represent will decline.
The loss absorption which junior capital has historically provided will
be reduced as a result of the refinancing, resulting in the senior
unsecured rating being revised to the Baa3 level.
As an investment grade issuer, L-3's Corporate Family
and Probability of Default ratings have been withdrawn. Similarly,
the Speculative Grade Liquidity rating was withdrawn as were Loss Given
L-3 continues with good liquidity but it faces an approaching put-date
on $700 million of its CODES notes on February 1, 2011.
On the same date and continuing thereafter, L-3 has an option
to call the notes in whole or in part. On a pro forma basis,
its cash holdings at the end of March would be some $0.5
billion following its acquisition of Insight which had a preliminary purchase
price of $613 million. Over the balance of 2010, L-3's
guidance suggests free cash flow of slightly more than $0.8
billion (Moody's definition is after dividends) and its $1.0
billion committed revolving credit facility remains essentially un-tapped
($32 million of L/Cs were issued against the commitment at the
end of the first quarter). This should provide sufficient resources
to address any amount of the CODES notes that may be put assuming future
share repurchases and/or acquisitions are modest in aggregate size.
The outlook is stable at the higher rating level and is supported by ongoing
free cash flow generation, a substantial backlog of business awards,
a good liquidity profile and a continuing favorable environment for defense
outlays albeit at lower growth rates.
L-3 Communications Corporation
$800 million senior unsecured notes due 2020, Baa3
Senior unsecured shelf filing (P)Baa3
L-3 Communication Holdings, Inc.
CODES notes to Ba1 from Ba2
L-3 Communications Corporation
Senior Subordinated notes to Ba1 from Ba2
L-3 Communications Corporation
$1,000 million Senior Unsecured Notes due 2019 to Baa3 from
L-3 Communication Holdings, Inc.
Corporate Family, Ba1
Probability of Default, Ba1
Speculative Grade Liquidity Rating, SGL-2
The last rating action was on September 29, 2009 at which time L-3's
CFR and PDR were upgraded to Ba1 from Ba2 and the outlook was changed
The principal methodology used in rating L-3 was the Global Aerospace/Defense
Industry methodology, published in January 2007 and available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in Rating Methodologies sub-directory on Moody's
website. Further information will be available in L-3's
credit opinion which will be posted on moodys.com.
L-3 Communications Holdings, Inc. is a prime contractor
in aircraft modernization and maintenance, C3ISR (Command,
Control, Communications, Intelligence, Surveillance
and Reconnaissance) systems, and government services. In
addition, L-3 provides high technology products, systems
and subsystems. Revenues in 2009 were approximately $15.6
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Moody's upgrades L-3 Communications to investment grade
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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