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Rating Action:

Moody's upgrades Leidos ratings: senior secured debt to Baa3 from Ba1, senior unsecured to Ba1; stable outlook

24 Sep 2019

Approximately $3.9 billion of rated debt affected

New York, September 24, 2019 -- Moody's Investors Service ("Moody's") upgraded its ratings for Leidos Holdings, Inc. and Leidos, Inc. (collectively, "Leidos" or the "company"). The senior secured debt has been upgraded to Baa3 from Ba1, and the senior unsecured debt has been upgraded to Ba1 from Ba2. Concurrently, the former Ba1 corporate family and Ba1-PD probability of default ratings have been withdrawn, along with the former SGL-3 speculative grade liquidity rating. The rating outlook is stable.

According to Moody's lead analyst Bruce Herskovics, "the upgrades reflect an otherwise investment grade credit profile but for the preponderance of secured (rather than unsecured) debt and incorporate Leidos' strong financial performance and leading position within the large national security and civilian agency enterprise modernization arena, a growing federal services category that will increasingly require contractors possessing labor breadth, solid technical skill and financial capability."

Regarding the prospect of incremental leveraging M&A transactions, Herskovics added that "Moody's expects Leidos to remain acquisitive as the sector continues to consolidate, but being already technically deep and at scale in its segments, the likelihood of another transformational acquisition such as the 2016 IS&GS merger seems remote."

The following rating actions were taken:

Upgrades:

..Issuer: Leidos Holdings, Inc.

....Senior Secured Regular Bond/Debenture (previously issued as Senior Unsecured debt), Upgraded to Baa3 from Ba1 (LGD3)

..Issuer: Leidos Innovations Corporation (all debts assumed by Leidos, Inc.)

....Senior Secured Bank Credit Facility, Upgraded to Baa3 from Ba1 (LGD3)

..Issuer: Leidos, Inc.

....Senior Secured Bank Credit Facility, Upgraded to Baa3 from Ba1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2 (LGD6)

Withdrawals:

..Issuer: Leidos Holdings, Inc.

.... Corporate Family Rating, Withdrawn, previously rated Ba1

.... Probability of Default Rating, Withdrawn, previously rated Ba1-PD

.... Speculative Grade Liquidity Rating, Withdrawn, previously rated SGL-3

Outlook Actions:

..Issuer: Leidos Holdings, Inc.

....Outlook, Remains Stable

..Issuer: Leidos, Inc

....Outlook, Remains Stable

RATINGS RATIONALE

The ratings broadly reflect Leidos' leading scale, good profitability and solid backlog growth trend. A supportive budgetary environment for US defense suggests solid revenue growth for Leidos over the next two to three years. Coupled with EBITDA margins that are likely to approximate 10%, Moody's expects Leidos to maintain leverage at or below 3x and generate asset returns in excess of 5% and free cash flow-to-debt of 10%-15%.

With over 32,000 employees and revenues approaching $11 billion, Leidos is the largest pure play defense services contractor with a well-diversified contract portfolio that spans US defense, intelligence and civilian agencies. The company's service capabilities cover numerous mission and enterprise categories, with several major long-term programs underway including the US Defense Healthcare Management System Modernization program (est. 13-years, $9 billion) awarded in 2015 and the recently awarded 10-year $2.9 billion NASA End User Services and Technologies contract.

The ability to compete for major foreign government service projects also furthers the company's revenue stream and addressable market. Leidos' heretofore successful UK Ministry of Defense Logistic Commodities and Service Transformation program, awarded in 2015 at $11-$12 billion over 13 years, is one such example.

With such large multi-year projects, the rating also incorporates potentially large associated risks. Subcontractors typically play important roles on these programs and overall program execution depends on such subcontractor performance, as well as good coordination among a multi-party contracting team. Fixed-price contract elements of these programs often necessitate very effective cost forecasting to meet profitability targets. The visibility of such work also carries significant reputational risk.

While Leidos has carried cash of around $500 million in recent quarters, the cash balance can at times decline to the $200 million to $300 million range, a relatively low amount in light of contract obligations and the company's overall revenue base.

The stable rating anticipates a supportive US budgetary setting and Leidos' $21.7 billion backlog at June 30, 2019, which should support revenue growth of 3% to 5% over the next two to three years. Moody's expects leverage no higher than 4x in a leveraging acquisition scenario, with de-leveraging to 3x or lower over the ensuing 12-18 months.

The Baa3 rating of the bank facility and notes reflects their proponderance within a credit profile that Moody's views as tantamount to investment grade, despite the high degree of secured debt. The Ba1 rating of the unsecured notes reflects their effective subordination within the mostly secured debt structure. All debts are equally guaranteed.

Upward rating momentum would depend on continued revenue and backlog growth with improving return and cash flow leverage metrics. Returns on assets above 7% and free cash flow-to-debt above 15% would be viewed as strong for the ratings. A strong liquidity profile including cash-to-sales approaching 10% would likely be a supporting consideration, as well.

Downward rating momentum would likely follow significant contract performance problems, backlog declines, or a departure from expected financial policy balance. Leverage sustained above 3.5x or a diminished liquidity profile, such as from low cash and/or ongoing revolver dependence, would be unfavorable.

Headquartered in Reston, Virginia, Leidos Holdings, Inc. is a defense/intelligence engineering, and health services provider. The Information Systems & Global Solutions ("IS&GS") business acquired from Lockheed Martin Corporation in August 2016 provides information technology, management and engineering services to the federal, state, local and foreign governments and commercial customers. Revenue for the twelve months ended June 30, 2019 was approximately $10.5 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, 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.

With reference to the withdrawal of the ratings of Leidos Holdings, Inc., The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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

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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