Fitch Downgrades Honeywell's IDR to 'A'; Outlook to Stable

2008-08-18 23:48:04 -

- Fitch Ratings has downgraded Honeywell International Inc.'s (NYSE: HON) long-term ratings as follows:

--Issuer Default Rating (IDR) downgraded to 'A' from 'A+';

--Senior unsecured bank credit facilities downgraded to 'A' from 'A+';

--Senior unsecured debt downgraded to 'A' from 'A+'.

Fitch also affirms HON's short-term ratings as follows:

--Short-Term IDR affirmed at 'F1';

--Commercial paper (CP) affirmed at 'F1'.

The Rating Outlook has been revised to Stable from Negative. Approximately $8.5 billion of debt outstanding as of June 30, 2008 is covered by the ratings.

The downgrade of HON's long-term ratings reflects higher debt levels and large share repurchases and acquisitions over the past eighteen months. The company's credit protection metrics, over a sustained period, have not improved toward levels anticipated by Fitch. HON's credit measures have been negatively affected by its discretionary spending for substantial net share repurchases that totaled $3.7 billion during the 18 months ended June 30, 2008. In addition, HON's cash spending for net acquisitions during the same period was approximately $2.2 billion. As a result, debt outstanding increased by $3.4 billion since the beginning of 2007, and debt/EBITDA was 1.6x times at June 30, 2008. Fitch anticipates that HON will reduce its leverage somewhat as it integrates, and realizes benefits from, recent acquisitions. Although HON has the financial capacity to potentially support a higher credit rating, its demonstrated financial policies with respect to discretionary spending indicate that the company's financial measures are likely to be more consistent with the current 'A' rating over the long term.

The ratings also incorporate HON's geographic and product diversification, competitive market positions, and a strong operating profile that has improved steadily as the company has realigned its business portfolio through acquisitions, divestitures and restructuring. In addition, HON has demonstrated a disciplined acquisition strategy and the ability to effectively integrate acquired businesses. The resulting sales growth and margin improvement have contributed to increasing operating cash flow and partly mitigated the impact of higher debt levels. The company is experiencing pressure in certain businesses that have exposure to the North American residential market, the automotive sector, and higher fuel prices. Rating concerns include the uncertain economic conditions, event risk in HON's important aerospace segment, the impact on leverage from future acquisitions or share repurchases, and ongoing cash payments required for asbestos liabilities and environmental remediation. These concerns are partly offset by strong demand in HON's aerospace and energy-related markets and the resolution of some of HON's litigation liabilities.

HON's financial flexibility was supported by roughly $3.1 billion of liquidity at June 30, 2008. Liquidity included $2.2 billion of cash and a $2.8 billion bank credit facility maturing in 2012, offset by $1.9 billion of debt due within one year, most of which was commercial paper. The company has issued approximately $3.4 billion of new debt over the past 18 months to help fund its share repurchases and acquisitions. As a result, debt increased to $8.5 billion as of June 30, 2008 compared to $5.1 billion at the beginning of 2007. In addition to on-balance sheet debt, HON fully utilizes a $500 million accounts receivable securitization program. HON's financial flexibility is further supported by its strong free cash flow that could be used to quickly reduce debt in the absence of discretionary spending.

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.

Fitch Ratings
Eric Ause, +1-312-606-2302 (Chicago)
Craig Fraser, +1-212-908-0310 (New York)
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