As disclosed in a press release earlier today, Fitch Ratings has placed
the ratings for DRS Technologies, Inc. (NYSE:DRS) on Rating Watch
Positive following the announcement that Finmeccanica SpA (Finmeccanica)
has agreed to purchase DRS for approximately US$5.2 billion.
For more details on Finmeccanica, please see the press release 'Fitch
Affirms Finmeccanica at 'BBB', places DRS Technologies on Rating Watch
Positive, On Announcement of Acquisition,' dated 13 May, 2008. The
Ratings Watch Positive applies to the following ratings:
--Issuer Default Rating (IDR) 'B+';
--Senior secured revolving credit facility 'BB+/RR1';
--Senior secured term loan 'BB+/RR1';
--Senior unsecured notes 'BB+/RR1';
--Senior unsecured convertible notes 'BB+/RR1';
--Senior subordinated notes 'B/RR5'.
On May 12, Finmeccanica, a leading European aerospace and defense firm
based in Rome, Italy, announced its intention to acquire DRS for EUR3.4
billion (approximately US$5.2 billion) to be funded through a bridge
loan facility. The facility is expected to be replaced by a combination
of new equity issuance, cash proceeds from asset sales, and new debt
issued by Finmeccanica.
The Rating Watch Positive is based on the likelihood of lower debt
levels at DRS as a result of the transaction. Finmeccanica is not
expected to guarantee any surviving debt at DRS, but debt levels at DRS
will likely fall as a result of the paydown of the term loan and the
change of control put option incorporated into DRS's bond indentures.
Fitch expects Finmeccanica will repay and terminate DRS's current senior
secured credit facility at closing. DRS's existing senior subordinated
notes obligations (US$250 million of 7.625% notes due 2018, and US$550
million of 6.875% notes due 2013) both contain change of control put
provisions within their indentures, which require the redemption of the
notes at 101% of par, at the option of the holders, if the transaction
is consummated. The US$350 million of 6.625% senior unsecured notes due
2016 also contain the same provision. The US$346 million of 2% senior
convertible notes would likely become convertible into cash up to the
amount of the consideration given for the company's common equity.
However, should any of these notes remain outstanding after the
transaction closes, they would likely benefit from some debt repayment
triggered by the change of control, as well as the stronger parent
credit profile.
Fitch anticipates a relatively strong parent subsidiary linkage between
DRS and Finmeccanica based on legal and strategic integration of the two
entities, although Fitch expects DRS could remain primarily independent
from an operating perspective and it is unlikely that the ratings of
Finmeccanica and DRS would be put at the same level. At this time, Fitch
does not expect Finmeccanica to guarantee any surviving DRS debt.
The Rating Watch is expected to be resolved at or before the closing of
the transaction, which is anticipated to be in the fourth quarter of
2008. The transaction has been approved by the boards of directors at
both firms, but remains subject to certain regulatory approvals. Should
the acquisition not close, Fitch expects that the current ratings and
Positive Outlook will remain in place. If for any reason the credit
facility or notes were to remain in place after a successful closing,
Fitch expects that the ratings within the capital structure could
migrate toward that of the new parent, whose IDR and senior unsecured
debt are currently rated 'BBB' with a Positive Outlook by Fitch,
depending on the final corporate structure and relationship between the
entities. However, as stated above, Fitch would not likely rate DRS debt
at the same ratings level as Finmeccanica.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public 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. The issuer did not participate in the rating process other
than through the medium of its public disclosure.
