DBRS Downgrades Textron and Textron Financial to BBB (low) and R-3

DBRS has today downgraded the Senior Debt of Textron Inc. (Textron or the Company), Textron Financial Corporation and Textron Financial Canada Funding Corp. (collectively, TFC) to BBB (low) from BBB (high) and their Commercial Paper ratings to R-3 from R-2 (high). The ratings have been removed from Under Review with Negative Implications, where they were placed on March 31, 2009; the trend on all the ratings is Negative. The rating action primarily reflects the weaker-than-expected financial outlook, primarily related to Textron’s Cessna division, and the challenges TFC continues to face. The Negative trend mainly reflects the uncertainty regarding the duration and severity of the current downturn and the potential that core credit metrics will further weaken well below levels considered acceptable for the current ratings over the near to medium term.

The rating action follows the announcement by Textron that its financial results in 2009 will be materially below previously lowered expectations. The well-documented sharp deterioration in macroeconomic conditions is largely responsible. Lower business jet orders or increased cancellations at Cessna and higher credit losses at TFC had a notable impact on Q1 2009 results and are expected to persist. The current ratings take into account the significant volatility in Textron’s manufacturing operations, mainly related to its Cessna and Industrial segments, and the expectation for continuing losses at TFC.

Textron now expects earnings per share (EPS) in the range of $0.45 to $0.75 (roughly $110 million to $180 million), which was revised from previous guidance of $1.00 to $1.50. The outlook revision indicates the continuing high degree of uncertainty facing many of Textron’s end markets, which have sharply weakened. The pace of the decline at Cessna is most concerning, particularly given the rate of order cancellations and margin compression. Cessna has historically been the largest contributor to consolidated revenue and earnings, and the negative demand outlook for business jets is likely to weigh most heavily on Textron’s operating results. Given that business jet demand has historically lagged the improvement in corporate profitability by roughly two years, a near-term recovery is unlikely. While DBRS rates through a cycle, the extent of the current downturn is much sharper than expected. DBRS now expects cash flow coverage below 20% and debt-to-EBITDA above 3.0 times at least over the near term.

The deterioration at TFC has also added pressure to the Company’s financial profile, mainly from increased losses and the need to address future large debt maturities. Cash injections from Textron’s manufacturing operations will continue to be required to maintain covenant compliance under the Textron-TFC support agreement. TFC is expected to continue to generate losses as it winds down its non-captive portfolio and remains exposed to increased credit losses. Importantly, lower-than-expected collections through 2010 remain a risk as challenging market conditions are likely to persist.

DBRS expects the Company to have sufficient liquidity to meet debt maturities in 2009 and 2010. Liquidations in Q1 2009 were ahead of schedule and the Company increased its previous target for the year, which provides a degree of comfort. That being said, in the event of future shortfalls in collections or weaker-than-expected cash flow from the manufacturing operations, this could reduce Textron’s financial flexibility as it addresses future maturities.

DBRS would expect to revisit the rating over the next two to three quarters to resolve the Negative trend. A downgrade would be likely if cash flow coverage falls materially below 20% and debt-to-EBITDA is above 3.0 times. Alternatively, the trend could be returned to Stable should Textron’s financial profile stabilize at more reasonable levels for the current ratings, combined with increased visibility regarding an eventual improvement in credit metrics.

Notes:
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.