Moody's Ups Newport News

Friday, March 17, 2000
Moody's Investors Service upgraded the senior unsecured debt rating of Newport News Shipbuilding Inc. (NNS) to Ba1 from Ba2 to reflect the company's improving operating and cash flow performance, and its strengthening business outlook and balance sheet.

The ratings also incorporate its still-weak balance sheet, notwithstanding the recent gradual improvements.

Moody's also said that it maintained its Ba1 ratings on the company's bank facilities, which were formerly secured by essentially all of the company's assets. However, in conformance with the credit agreement, the collateral was recently released, and the bank facilities rank equally with the company's other senior unsecured debt.

Upgraded ratings are: Newport News Shipbuilding Inc.: its senior unsecured debt to Ba1 from Ba2; and its subordinated debt to Ba3 from B1. Confirmed ratings are: Newport News Shipbuilding Inc.-the Ba1 on its bank facilities.

After years of poor performance related primarily to its commercial shipbuilding business - which it exited - Newport News Shipbuilding recorded two years of improved operating performance and cash flows, which led to stronger overall coverage.

Furthermore, its positive cash flows have led to reduced debt levels, which together with its expanded equity base (through retained profits), have led to a somewhat stronger, albeit still leveraged balance sheet.

The company's outlook has also improved as a result of the resurgence of growth in the U.S. defense spending. The improved outlook also reflects its strong market position as the only U.S. shipyard capable of building nuclear-powered aircraft carriers and its advantageous position as one of the only two U.S. nuclear submarine builders.

These strong market positions for new platforms - together with its good profit margins, its refocus on the stable repair, overhaul and engineering sectors - indicate that the company will likely produce at least stable revenues and profits. Low capital expenditures and working capital requirements should lead to moderate free cash flows and continuing gradual debt reduction -which is in line with the rating agency's understanding of the company's financial objectives.

Moody's cautioned, however, that significant stock repurchases and/or debt funded acquisitions could undermine NNS' improving balance sheet, which, the recent debt reductions notwithstanding, remains highly leveraged.

Such actions would place pressure on NNS' credit quality. Newport News Shipbuilding, Inc., headquartered in Newport News, Virginia, is a world leader in building navy ships, aircraft carriers, and submarines.


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