Fitch Ratings has revised the Rating Outlook for Honeywell International Inc. (NYSE: HON) to Negative from Stable. The revision follows HON's announcement on April 4, 2008 that it has agreed to acquire Norcross Safety Products L.L.C for $1.2 billion, which is likely to be financed with a combination of cash and debt. Any additional debt used to fund the purchase of Norcross will increase HON's debt and financial leverage, which Fitch already considered to be high for HON's ratings.
HON's current ratings are as follows:
-- Issuer Default Rating (IDR) 'A+';
-- Senior unsecured bank credit facilities 'A+';
-- Senior unsecured debt 'A+';
-- Short-Term IDR 'F1';
-- Commercial paper (CP) 'F1'.
Approximately $7.7 billion of debt was outstanding at Dec. 31, 2007.
HON's leverage reflects an active acquisition program as well as aggressive share repurchases, including nearly $3.4 billion of repurchases in 2007, and the pending acquisition can be expected to temporarily delay an improvement in HON's credit measures. Future rating actions will depend on HON's deployment of its substantial free cash flow to reduce debt and control leverage. Operating performance will also be a key factor in determining future rating actions. A downgrade of the ratings could be considered in the absence of a meaningful reduction in leverage over the next 12 months-18 months, at least to levels reported at the end of 2006 when total adjusted debt/EBITDAR was 1.8 times (x). Fitch does not anticipate that the ratings would be downgraded more than one notch. A one-notch downgrade, if it were to occur, would not likely result in a revision to the short term IDR or commercial paper rating.
The concern about HON's leverage is partly offset by its solid operating performance and cash flow. The ratings also incorporate HON's geographic and product diversification and favorable demand trends in many of its markets, particularly at the aerospace and UOP businesses.
HON has steadily improved its business portfolio through restructuring, acquisitions and divestitures. As a result, it has sufficient financial capacity to rebuild its credit measures after the Norcross acquisition is completed. Rating concerns that could potentially constrain HON's ability to reduce debt include future large acquisitions, the possibility of economic weakness in HON's end-markets, event risk in HON's important aerospace segment, and ongoing cash payments required for asbestos liabilities and environmental remediation.
HON's liquidity is supported by $1.8 billion of cash as of Dec. 31, 2007 and availability under a $2.8 billion bank credit facility maturing in 2012, offset by $1.8 billion of commercial paper and over $400 million of current maturities. In addition, HON fully utilizes a $500 million accounts receivable securitization program. At the end of 2007 debt/EBITDA was nearly 1.6x and total adjusted debt/EBITDAR (including off-balance sheet debt) was 2.1x. In February 2008, HON issued $1.5 billion of long term debt which increased its total long term debt to slightly more than $7 billion. Proceeds were used to reduce commercial paper balances. The relatively high proportion of long term debt means that continued strong operating performance will be an important part of HON's ability to manage its financial leverage.
The acquisition of Norcross will add a new product line to the Honeywell Life Safety business which is part of HON's Automation and Control Solutions segment. Norcross makes personal safety equipment for workers in the fire safety, utility and general industrial markets. Integration risk is not viewed as a major concern based on HON's successfully integration of large acquisitions in the past.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Craig
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Brian Bertsch, +1-212-908-0549
(Media
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