S&P Places Leidos (LDOS) on Watch for Possible Downgrade (LMT)

Standard & Poor's Ratings Services said today that it has placed all of its ratings on Leidos Holdings Inc., including our 'BBB-' corporate credit rating, on CreditWatch with negative implications.

"The CreditWatch placement reflects the significant amount of debt that Leidos will incur to fund special payments to its shareholders in conjunction with its planned merger with Lockheed Martin's government IT services business (known as Information Systems & Global Solutions [IS&GS]) through a Reverse Morris Trust transaction," said Standard & Poor's credit analyst Chris Mooney. Lockheed will receive a special $1.8 billion payment at close while Leidos' existing shareholders will receive a special $1.03 billion payment. These payments will be funded with $2.5 billion in incremental debt and cash on hand.

We plan to resolve the CreditWatch placement prior to the close of the transaction after we meet with the company's management team to discuss their strategic rationale and financial policy and obtain more information to increase the accuracy of our forecasted credit ratios. We could lower our rating on Leidos if we believe that the improvement in the company's business risk profile is not significant enough to warrant the deterioration in its financial risk profile, though we would not expect to downgrade the company by more than one notch.

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