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Rating Action:

Moody's upgrades L-3 Communications to investment grade

Global Credit Research - 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 Default assessments.

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.

Ratings assigned

L-3 Communications Corporation

$800 million senior unsecured notes due 2020, Baa3

Senior unsecured shelf filing (P)Baa3

Ratings upgraded:

L-3 Communication Holdings, Inc.

CODES notes to Ba1 from Ba2

L-3 Communications Corporation

Senior Subordinated notes to Ba1 from Ba2

Ratings downgraded:

L-3 Communications Corporation

$1,000 million Senior Unsecured Notes due 2019 to Baa3 from Baa2

Ratings withdrawn

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 to stable.

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 billion.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Edwin Wiest
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades L-3 Communications to investment grade
No Related Data.
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