“Our credit rating is going to be under pressure," United Technologies (NYSE:UTX) CEO Greg Hayes said today following the company's debt-heavy takeover of Rockwell Collins (NYSE:COL), and indeed the reaction from credit rating agencies was swift.
Moody's and S&P both placed UTX on review for a one-notch downgrade, with the former saying the company may have to increase “reliance on inherently uncertain earnings growth to moderate leverage... The time to decrease leverage to United Technologies’ current levels could be lengthy."
On the plus side, the deal will help profit margins and cash flows of the merged company, Moody’s says.
The debt funding for the deal is “onerous,” GimmeCredit analyst Carol Levenson says, adding that unless UTX "finds a painless way to use some of its offshore cash, we estimate that its leverage would soar from 2.4x to nearly 4x, an all-time high.”
UTX will see “a pretty significant hit” to near-term earnings per share, according to analysts at Vertical Research, which also expects "limited upside near term as share repurchase is withdrawn and deal timing becomes an investor focus."
But Moody's says the plan to suspend share buybacks is "helpful... [as] it does show commitment that they intend to restore the credit metrics.”
UTX fell 5.7% in today's trade; COL added 0.3%.
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