Moody's Lowers Outlook on Booz Allen Hamilton (BAH) to Negative; Ratings Affirmed

Moody's Investors Service has changed the rating outlook of Booz Allen Hamilton Inc. (NYSE: BAH) to negative from stable, and affirmed the debt ratings, including the Ba2 Corporate Family Rating.

RATINGS RATIONALE

The negative rating outlook reflects the potential for reputational and financial impact from the Federal Bureau of Investigation's recent criminal complaint against a former BAH employee. Moreover, the circumstances surrounding the complaint, at least what has been disclosed to date, raise questions around the company's internal controls and governance standards in conducting its business with the government. This FBI complaint has characteristics similar to circumstances with another former BAH employee that took place in 2013.

Contractors providing services within highly classified settings are expected to meet exceptionally high standards of conduct. In Moody's view, control procedures that match the national security mission, represent a critical element of operations. BAH derived about 24% of its revenues from contracts with US intelligence agencies in the 2016 fiscal year. To the extent this development affects BAH's reputation negatively, business development prospects and cash flow generation capability could weaken. Switching costs and differentiation levels between services contractors are often not very high and the government can terminate contracts for convenience or default.

The ratings will remain under pressure unless the company can demonstrate an effective response, which will probably add operating cost and thereby lessen price competitiveness. The rating could be downgraded with backlog losses, debt to EBITDA rising to the high 3x range, funds from operation/debt descending toward 15%, diminished liquidity such as from covenant headroom pressure or ongoing revolver dependence. The rating outlook could be stabilized with evidence that BAH has addressed the complaint without a material impact to its financial condition or business prospects.

Outlook Actions:

..Issuer: Booz Allen Hamilton Inc.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Booz Allen Hamilton Inc.

.... Probability of Default Rating, Affirmed Ba2-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Corporate Family Rating, Affirmed Ba2

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD3)

The principal methodology used in these ratings was Global Aerospace and Defense Industry published in April 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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