S&P Global Ratings downgraded Northrop Grumman Corp.'s corporate credit rating to BBB from BBB+, with a stable outlook, and removed the defense contractor from CreditWatch following the completion of its $9.2 billion acquisition of Orbital ATK Inc.
The target is now called Northrop Grumman Innovation Systems.
S&P said the deal will result in a significant deterioration in Northrop's credit metrics. Although the combination will improve the defense contractor's business, S&P said the improvements may be insufficient to offset its debt burden.
"Despite management's plans to focus [on] reducing debt following the transaction, we believe dividends and share repurchases will continue to consume a meaningful portion of the company's sizable cash flows, causing credit metrics to improve only moderately over the next few years," S&P said.
The increased debt stemming from the financing of the transaction will push Northrop's pro forma debt-to-EBITDA ratio up to 3x to 3.5x in 2018 from 1.7x in 2017, and it will cause the ratio of funds from operations to debt to decline to 18% to 22% in 2018 from 41% in 2017, S&P said.
"Although we expect these respective ratios will improve to 2.5x-3x and 24%-28% in 2019, due to earnings growth and some debt repayment, they will remain weaker than current levels for the foreseeable future," the rating agency said.
S&P said the stable outlook reflects its expectation of gradual improvement in the company's credit metrics over the next 12 to 24 months because of earnings growth and some debt repayment.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.
