S&P Places Rockwell Collins (COL) Ratings on Review for Downgrade Amid Move to Acquire B/A Aerospace

October 24, 2016 10:51 AM EDT

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S&P Global Ratings said today that it has placed its 'A-' long-term corporate credit rating on RockwellCollins Inc. and its 'A-' issue-level ratings on the company on CreditWatch with negative implications. We did not place our 'A-2' short-term corporate credit rating or 'A-2' commercial paper rating on the company on CreditWatch because we do not expect them to be affected by the transaction.

"The CreditWatch negative placement reflects the significant deterioration in Rockwell's credit metrics pro forma for the proposed acquisition despite the company's decision to use a material amount of its stock to partially fund the purchase," said S&P Global credit analyst Christopher Denicolo. "We believe that the combination will modestly improve Rockwell Collins' business by increasing its scale, the scope of its product offerings, and its customer diversity, though we do not expect that this improvement will be sufficient enough to offset the company's increased debt burden." Despite a commitment by management to reduce share repurchases to the minimum level required to offset share dilution (about $100 million per year) and to dedicate the company's excess cash flow to reduce its debt by $1.5 billion by fiscal-year 2019, Rockwell's credit ratios will not return to their current levels until fiscal-year 2020. Furthermore, although there is almost no product overlap between the two companies, integration risk remains concern because this will be Rockwell's largest acquisition by far.

We expect to resolve the CreditWatch negative placement when the transaction closes. If the acquisition closes on terms substantially similar to those presented to us, including a commitment by management to reduce the company's share repurchases and use excess cash flows to reduce its debt, we expect to lower the long-term corporate credit rating to 'BBB' and assign a stable outlook. We will also likely affirm our 'A-2' short-term rating on the company.



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