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Fitch lowers Northrop Grumman's ratings to BBB; S&P warns of possible downgrade

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Fitch lowers Northrop Grumman's ratings to BBB; S&P warns of possible downgrade

Fitch Ratings downgraded Northrop Grumman Corp.'s issuer default rating and debt ratings to BBB from BBB+, with a stable outlook, as it expected the company's outstanding debt to more than double after acquiring Orbital ATK Inc.

The rating agency placed Northrop's ratings on Rating Watch Negative in September following the Orbital acquisition, which was mostly funded through new debt issuance. Fitch assigned BBB ratings to the new debt.

According to Fitch, Northrop's adjusted leverage and funds from operations adjusted leverage will increase to about 3.4x and 3.9x respectively, on a pro forma basis, at the end of 2018, before declining in 2019 and 2020 due to debt reduction efforts, good operating margins, and growth from the Orbital transaction.

Fitch said Northrop's credit profile could return to the BBB+ level if Orbital's integration succeeds and debt maturities are paid down over the next two to three years.

However, Fitch noted some risks to the integration, including Northrop's inexperience in absorbing large-scale operations and its lack of recent acquisitions.

If the integration risks are retired, Fitch said it may consider a positive rating action, though this move is not expected over the next several years due to the gradual pace of Northrop's leverage reduction.

Meanwhile, S&P Global Ratings assigned its BBB issue level ratings to Northrop's proposed senior unsecured notes due 2020, 2022, 2025, 2028, and 2047.

S&P said the ratings on the proposed notes reflect the possibility that it will lower the corporate credit rating on Northrop Grumman to BBB from BBB+ once the Orbital deal closes, which is expected to happen in the first half of 2018.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.