Credit analyst more optimistic on Northrop with Blackstone rescue

By Ronda Fears

Nashville, Nov. 22 - Northrop Grumman Corp.'s sale of the TRW automotive business to The Blackstone Group improves the credit view on Northrop, said Carol Levenson, director of research at Gimme Credit, although she's not championing the credit just yet.

"Once again, a private investment fund [Blackstone] has come to the rescue of one of the big boys [Northrop] by agreeing to take some assets off their hands and, even better, to pay mostly cash for them," Levenson said in a report Friday.

"We originally said Northrop would be of weak BBB credit quality under a best case scenario. This scenario is looking much more likely with the pending sale of the automotive business, making us slightly more sanguine about the credit.

"This sale, assuming Northrop lives up to its promise to use the proceeds to reduce debt, strengthens the credit quality outlook for the [TRW] merger."

Although things aren't working out precisely as Northrop (Baa3/BBB-) thought they might, the end result is a lot more certainty about the outcome of the TRW merger, the analyst said.

Blackstone has committed financing for the $3.8 billion cash portion of the purchase and Northrop could get another $200 million at closing by selling half of the 40% equity stake it will retain.

Almost as important as the cash is the off-loading of the automotive business's asbestos liabilities, she said, although Northrop will retain some exposure to other litigation.

"This will leave Northrop right where it wanted to be, in possession of TRW's most attractive and complementary assets but with nearly all of TRW's debt load wiped out," Levenson said.

Gimme Credit projects pro forma net leverage will fall to the mid 20s at closing, assuming a $1 billion dollar pension charge and no goodwill impairment. Because of a $1 billion dollar payment of deferred taxes next year, cash flow from operations is expected to be close to zero.

"Therefore we're projecting debt, absent additional asset sales, could actually increase somewhat to compensate for negative free cash flow, leaving leverage in the mid 20s," Levenson said.

"Hopefully this huge cash outlay for taxes is a once-in-a-century event, so you really need to look out to 2004, with a more normal cash flow profile, when we see book leverage falling to the low 20s and, more important, cash flow to debt returning to the mid 30s."

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