OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BB+EXP/RR4' to Orbital ATK Inc.'s (OA) proposed senior unsecured notes. OA plans to issue \\$400 million of senior unsecured notes due 2023 that will rank equally with the company's existing unsecured notes.

Additionally, the company plans to enter into \\$1.8 billion of new senior secured credit facilities concurrent with the offering of the notes. The new credit facilities will consist of an \\$800 million term loan facility and a \\$1 billion revolving credit facility.

The proceeds from the offering and the new term loan will be used to repay all of the borrowings under OA's existing senior secured credit facilities. The remaining balance of the proceeds (if any) will be used for general corporate purposes. Fitch calculates OA's total debt will remain largely unchanged after the transactions, and the ratings will cover approximately \\$1.5 billion of outstanding long-term debt after giving effect to the new issuances and the expected repayment of the existing debt.

OA's existing ratings are listed at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS
The ratings and Stable Outlook are supported by OA's solid margins and strong cash flows, good product/program diversification, significant cost saving synergy opportunities from the merger between Alliant Techsystems Inc. (ATK) and Orbital Sciences Corporation (ORB) completed on Feb. 9, 2015, and OA's role as a sole source provider for many of its products. The ratings are also supported by adequate financial flexibility and Fitch's expectations that OA will improve its credit metrics by fiscal 2017 driven by improvements in operating performance and debt reduction.

Fitch estimates OA's credit metrics will improve over the next two years driven by modest revenue growth, marginal operating improvements and scheduled repayment of the company's term loans. Fitch expects OA's leverage and adjusted leverage will decline to 2.4x and 3.0x, respectively, by the end of fiscal 2017. FFO adjusted leverage is also expected to improve to 3.9x during the same time frame. Other metrics such as FCF margin and FFO fixed charge coverage are solid for the ratings.

Fitch is concerned with merger integration risks, rising competition in some space sectors, a continued decline in small caliber ammunition demand and a significant exposure to the U.S. Government, which accounted for approximately 75% of total revenues at the end of fiscal 2014 ended March 31, 2015.

Fitch is also concerned with the \\$850 million underfunded status of OA's defined pension plans (73% funded as of the end of fiscal 2015), up from \\$562 million (81% funded) at the end of fiscal 2014. The deterioration of the underfunded status of the pension liabilities was driven by the adoption of new mortality tables and adverse movements in prevailing interest rates. OA contributed \\$80.4 million to its defined benefit plans in fiscal 2014 and is expected to contribute \\$40 million (the minimum required contribution) in fiscal 2016.

The notching up of the senior secured credit facility by one rating level from the IDR of 'BB+' to 'BBB-' is supported by the coverage provided by OA's tangible assets and operating EBITDA compared to the fully drawn facility. The collateral for the facility includes substantially all of OA's assets with certain exceptions.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for OA include:

--Low single digit revenue growth;
--EBITDA margins at approximately 13% increasing to approximately 14% at the end of fiscal 2017;
--Debt repayment will be gradual;
--Annual dividend payments will be in the range of \\$60 million to \\$65 million over the next several years;
--OA' share repurchases will be in the range of \\$50 million to \\$75 million over the next several years;
--Cash flow generation will be positive, with the company generating above \\$200 million of FCF annually;
--Capital expenditures will fluctuate in the range of 2.4% to 3% of revenues, annually;
--OA is not expected to make sizable acquisitions in the near future.

RATING SENSITIVITIES
Fitch does not expect to take positive rating actions over the next several years until OA reduces its leverage and successfully completes the merger integration. A positive rating action will also depend on the clarity of the company's future financial policies and cash deployment strategy.

Fitch may take a negative rating action if the company's leverage and adjusted leverage remain above 3.0x and 3.5x for a prolonged and sustained period of time. Fitch may also consider a negative rating action if the company's FFO adjusted leverage remains above 4.25x by the end of fiscal 2016 or if FCF margin declines and remains below 3%.

Additionally, a negative rating action may be considered if the merger results in unforeseen operating challenges and the company fails to achieve expected financial results, or if the company engages in sizable share repurchases prior to reducing leverage.

LIQUIDITY
OA has adequate financial flexibility for the ratings. Fitch expects the company's liquidity will be in the range of \\$900 million to \\$1.1 billion over the next several years after giving effect to the anticipated increase of the revolving credit facility to \\$1 billion from \\$700 million. Fitch anticipates OA's cash balance will fluctuate in the range of \\$50 million to \\$200 million and the company will maintain a balance of approximately \\$175 million of outstanding letters of credit. The company will have a favorable maturity schedule following the completion of the offering and the renewal of its senior secured credit facilities.

FULL LIST OF RATING ACTIONS

Fitch currently rates OA as follows:

--IDR 'BB+';
--Senior secured bank facilities 'BBB-/RR1';
--Senior unsecured debt 'BB+/RR4'.

The Rating Outlook is Stable.