DBRS Places Textron & Textron Financial Under Review – Neg

DBRS has today placed the Senior Debt and Commercial Paper ratings of Textron Inc. (Textron or the Company), Textron Financial Corporation and Textron Financial Canada Funding Corp. (collectively TFC) Under Review with Negative Implications. The rating action follows the announcement that Textron plans to exit all of TFC’s non-captive financial business, and that near-term earnings related to its manufacturing operations will be weaker than previously expected. Continuing deterioration in the global economy and credit market conditions has increased the risk that the Company may not be able to stabilize its financial profile. Further declines in operating performance would likely result in associated credit metrics that are not compatible with the current ratings. DBRS expects to resolve the Under Review – Negative status over the coming weeks.

DBRS expects that Textron’s key credit metrics will weaken over the near term, stemming largely from the restructuring initiatives and ongoing challenges at TFC, and weaker-than-expected results from its manufacturing operations. Debt-to-capital (adjusted for leases) is likely to approach 50% (at the manufacturing level), which is considered aggressive for the rating, and coverage ratios are expected to moderate. The increase in leverage is largely related to various TFC-related restructuring charges (e.g., mark-to-market losses, goodwill write-downs, etc.) totaling roughly $500 million (pre-tax) that will be incurred in Q4 2008 and reduce the Company’s equity base. The financial impact was greater than DBRS had previously expected when Textron announced its first round of restructuring initiatives at TFC in October 2008. In order to meet the requirements set under its credit facilities and support agreement with TFC, Textron is also required to increase its capital contribution to $600 million in Q4 2008 (from roughly $200 million planned for Q1 2009).

Textron revised downward its outlook for consolidated Q4 2008 earnings. Higher TFC provisions due to ongoing credit market stress and weaker-than-expected operating earnings from its manufacturing operations were mainly responsible. The reduction in manufacturing operating earnings guidance is attributed to increasingly difficult Industrial and Cessna division market conditions. A key challenge facing Textron is the ability to generate sufficient cash flow to reduce debt in 2009 and manage losses at TFC. The orderly liquidation and planned sale of Textron’s non-captive finance business is not expected to be completed in 2009, which could expose the Company to future write-downs/other restructuring charges and cash requirements. In addition, DBRS had previously expected the Company to generate strong cash flow, mainly supported by the strong order backlog at Cessna. However, the downward revision to earnings for Q4 2008 has increased the potential for weaker-than-expected cash flow, which could further pressure coverage ratios and free cash flow generation.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Industrial Products Industry which can be found on our website under Methodologies.

This is a Corporate rating.