Moody's Lowers Speculative Grade Rating on Orbital ATK (OA) to 'SGL-3'; Other Ratings Affirmed

August 11, 2016 2:31 PM EDT

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Moody's Investors Service has lowered the speculative grade liquidity rating of Orbital ATK, Inc. (NYSE: OA) to SGL-3 from SGL-2, denoting adequate rather than good liquidity. All other ratings, including the Ba2 Corporate Family Rating, are unaffected at this time and the rating outlook is stable


The less favorable view of OA's liquidity -- to an adequate level of liquidity -- follows the company's disclosure of: 1) the need to restate its financial statements and 2) delayed filing of second quarter 2016 financials as a result. The SGL-3 also considers that OA is unlikely to build cash, and therefore lessen revolver dependence, because the company is likely to continue to repurchase shares when able.

OA reported that it held only $60 million in cash at the end of its June, 2016 quarter. The company's cash flow from operations is lumpy, often affected by progress payments associated with its large contracts. Further, OA is expected to draw under its revolver intra-quarter. That revolver ($1 billion, of which about $125 million was borrowed and $130 million was utilized by letters of credit at April 2016) requires timely financial reporting as part of the maintenance covenants. However, as a condition to borrow, the financial reporting requirement has been waived by its bank lenders through November 14, 2016. Should the company be unable to file its financials by then, an additional waiver will likely be required. As well, the indentures governing OA's bonds also require timely financial reporting.

The company's existing ratings are unaffected by the lower liquidity and the estimated forward loss provision (pre-tax operating income down by $400 million to $450 million, retained earnings down $250 million to $280 million). The amount is sizeable as the contract in question is a long term one, and the charge is expected to result in a reported loss for last year. This event along with news of a material weakness over financial controls, does consume some of the flexibility that the company had in its ratings. Remediation planned by OA around the control weakness, nor the timing, have yet to be determined.

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