Science Applications Int'l (SAIC) Assigned 'BB' Rating by S&P; Outlook Stable

Standard & Poor's Ratings Services said that it has assigned its 'BB' corporate credit rating on U.S.-based Science Applications International Corp. (NYSE: SAIC). The outlook is stable.

At the same time, we assigned our 'BB' issue-level rating to the company's secured credit facility, which includes the existing $500 million term loan A (roughly $489 million outstanding as of Jan. 31, 2015), a $100 million add-on to the term loan A, a $200 million undrawn revolver, and a new $570 million term loan B. We assigned the credit facility a recovery rating of '3', indicating our expectation for meaningful (50%-70%; lower end of the range) recovery in a simulated default scenario.

"Our rating on SAIC reflects the competitive nature of the government services market combined with the company's elevated debt levels following its proposed debt-financed acquisition of Scitor Corp., but also factors in its solid and predictable free cash flow, much of which we expect to be applied to debt reduction over the next year," said Standard & Poor's credit analyst Chris Mooney.

SAIC plans to raise $670 million of additional debt, which, along with its cash on hand, will be used to fund the $790 million Scitor acquisition resulting in debt-to-EBITDA rising to about 3.5x on a pro-forma basis (including earnings from Scitor) from about 1x previously. We believe this level of financial leverage is slightly higher than what management is comfortable operating with on a sustained basis and anticipate that SAIC's debt-to-EBITDA will average 3x or below over time. Still, we believe that future acquisitions are possible in the coming years, which could cause this
ratio to temporarily spike above 3x.

The stable outlook reflects our belief that the company will likely generate solid cash flow despite the challenging conditions for service contractors, which, if applied toward debt reduction, should lead SAIC's debt-to-EBITDA to decline to 2.6x-3.0x over the next year from about 3.5x on a pro-forma basis.

We could raise our rating on SAIC if its debt-to-EBITDA falls below 2.5x and its FFO-to-debt rises above 30%, which would most likely be caused by debt reduction, with a commitment from management to maintain these levels for a sustained period.

Although unlikely, we could lower the rating if the company's debt-to-EBITDA rises above 4x and its FFO-to-debt falls below 20% for a prolonged period, which would most likely be caused by increased debt to fund an acquisition or shareholder rewards. Although less likely, this deterioration of SAIC debt ratios could also be caused by operating challenges that result in lower earnings, including the loss of key contracts due to budget reductions, integration problems, or increased price competition for new awards.

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