Moody's Rates United Technologies (UTX) Latest Debt Offering at 'A3'; Outlook is Stable
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Moody's Investors Service assigned A3 ratings to the proposed new debt issuance by United Technologies Corporation (NYSE: UTX), including senior unsecured notes aggregating an expected $4 billion in face value at varying maturities. All existing ratings for the company remain unchanged, including the P-2 commercial paper rating, as outlined below. The rating outlook is stable.
"Although net proceeds will partially support the refinancing of near-to-medium term debt maturities, a portion will be used to term out commecial paper borrowings related to already completed share buybacks," according to Russell Solomon, Senior Vice President and Moody's lead analyst for United Technologies. "United Technologies' continued employment of more aggressive financial policies than would typically be associated with A-rated companies remains a noteworthy rating constraint," said Solomon.
United Technologies' ratings continue to broadly reflect the company's large size and geographic scale, with leading positions in growing and diversified business lines that generate consistently solid double-digit operating margins and relatively stable free cash flows that are forecast to approximate $3 billion annually after dividends. An intense focus on cost management remains integral to normal course operations and has contributed to high and relatively consistent profitability measures, notwithstanding some slow-down and lagging performance metrics in recent periods. The company benefits from a sizeable installed equipment base and order book, and associated high-margin annuity-like revenue streams that are inherent to most of its aerospace and industrial business lines. Liquidity is excellent, albeit with lingering challenges related to cost-effective repatriation of overseas earnings and excess cash balances, and the ensuing need to issue short-term commercial paper in order to fund planned share repurchases. With a portfolio of sizeable and globally competitive business units and good perceived control over operating costs, the A3 senior unsecured rating for United Technologies incorporates an expectation that the company will be able to effectively manage through global economic cycles while consistently maintaining a strong financial profile.
Financial leverage remains elevated and will be further strained by current and future debt-funded shareholder return initiatives, a large and rising pension deficit, and ongoing heavy capital investment in support of new product launches and a steep production ramp, which will continue to constrain forward cash flows. Coming changes in sales mix, persistent volatility in foreign currency exchange rates and oil prices, and stagnant macroeconomic conditions in Europe coupled with a slow-down of growth in China will also continue to exacerbate an already tough competitive environment and further pressure forward earnings. Increasingly aggressive financial policies that are more consistent with a "Baa" credit profile could pressure ratings before the company exits the heavy investment phase of its business cycle.
The stable rating outlook anticipates a leverage profile that will remain elevated for the rating category over the forward rating horizon (3.0x to 3.5x on a Moody's-adjusted Debt-to-EBITDA basis), with earnings growth tempered in the near-term but ongoing support of the company's share price persisting via modest incremental debt-funded stock buybacks, nonetheless. Overseas cash is expected to grow, with repatriation as needed to fund at least the company's high and rising dividend payout, but otherwise used to fund prospective future (non-US) acquisitions of modest size. Successful execution of the geared turbofan roll-outs and various restructuring programs is assumed in the stable rating outlook, which should mitigate incremental business pressures and further erosion of the company's key credit metrics.
WHAT COULD CHANGE THE RATING DOWN
Negative rating pressure could ensue if further weakening of the business environment or operational disruptions impede the execution of the company's business plan over the coming two- to three-year transition period. A negative rating action could also follow a sizable debt-funded acquisition, or share repurchases in excess of the company's internally generated free cash flows and already stipulated levels, particulary if offsetting cash balances held overseas do not grow comparably. If the company maintains financial leverage (Moody's-adjusted Debt-to-EBITDA) in excess of 3.25x on a sustained basis, or Retained Cash Flow-to-Net Debt drops below 25%, ratings could face downward pressure.
WHAT COULD CHANGE THE RATING UP
The rating could warrant consideration for potential upgrade upon a material improvement in the macroeconomic environment. Additional factors associated with a prospective upgrade include a meaningful expansion of margins, other profitability measures and free cash flow generation, with Moody's Adjusted Debt-to-EBITDA trending towards the low 2x range and an expectation that it would remain there, along with sustainment of an excellent liquidity profile.
The principal methodology used in these ratings was the "Global Aerospace and Defense Industry" methodology published in April 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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