United Technologies Corp. (UTX)’s credit ratings are in jeopardy after Moody’s Investors Service cut its outlook to “negative,” citing a reduced reliance on stock to pay for the $16.5 billion acquisition of Goodrich Corp. (GR)
United Technologies may not issue any common shares after initially saying it would raise as much as $4 billion, according to Moody’s analysts Russell Solomon and Michael Mulvaney. Focusing on the corporate bond market and asset sales “entails more execution risk,” they said today in a statement.
The cut imperils United Technologies’ ability to keep a pledge to maintain its A2 grade from Moody’s and equivalent A rating from Standard & Poor’s. Chief Executive Officer Louis Chenevert told investors he would “maintain our credit ratings, or work very hard to do that” when the Goodrich deal was announced on Sept. 21.
“Our best guess is they’re unlikely to do any common equity at all and they’re more likely to use hybrid securities that have elements of debt and equity,” Solomon said in a telephone interview. “We got comfortable that they would be able to get their credit metrics back in line. Now that the equity is off the table, they’re pushing our comfort zone.”
Chenevert said last week he saw a “clear path” for United Technologies to cut its equity issue for the deal by at least 50 percent, to $2 billion or less. John Moran, a spokesman for the Hartford, Connecticut-based company, declined to comment today beyond Chenevert’s remarks.
Buying Goodrich will add the world’s largest maker of aircraft landing gear to United Technologies brands that include Pratt & Whitney jet engines and Sikorsky helicopters, along with industrial products such as Otis elevators and Carrier air conditioners.
United Technologies fell 0.2 percent to $83.47 at the close in New York.
Moody’s may cut the company’s ratings if it can’t reduce debt assumed to pay for the acquisition “in short order,” Solomon and Mulvaney wrote. An upgrade is unlikely until Goodrich is integrated, they said.
United Technologies said it planned to pay for 75 percent of the acquisition with the proceeds of debt offerings and 25 percent with money raised through equity issuance when the deal was announced on Sept. 21. S&P cut its outlook to “negative” the next day.
United Technologies is also considering selling units including its pump- and compressor-making business and its Rocketdyne division to raise cash for the purchase, according to people with knowledge of the matter.
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