Citing a “heightened risk profile,” Moody’s Investors Service downgraded United Technologies debt rating on Monday.
Moody’s lowered the Farmington aerospace parent’s senior unsecured debt rating from “A2” to “A3.” Though it’s a step down, Moody’s still considers A3 to be an investment-grade rating. UTC also kept its “stable” outlook.
The downgrade follows Standard & Poors’ decision last month to lower its outlook on UTC from stable to “negative,” citing concerns over planned share repurchases.
Russell Solomon, a Moody’s senior vice president, said in a statement that UTC has gradually been developing a greater investment appetite, following its CEO succession last year and other senior management changes that followed.
The company’s willingness to take on added financial risk “comes at a time when the fundamental business operations lag prior expectations,” Solomon said. “Our base case, reflective of the A3 senior debt rating, now incorporates the expectation that higher debt and financial leverage is more likely than previously anticipated for some combination of shareholder returns, business investment or acquisitions. The long term rating could be pressured further with an outsized debt-funded acquisition.”
UTC’s financial debt-to-earnings leverage is expected to creep upward as it continues to borrow for share repurchases and other activities.
Moody’s said UTC’s liquidity is excellent overall. But the company faces “increasing challenges related to tax ramifications with most cash balances trapped overseas, and ensuing excessive short-term commercial paper borrowings that increasingly look to be a permanent part of the capital structure.”
Future cash flow and earnings will be constrained by capital investment in new product launches and production ramp-up, as well as a strong U.S. dollar, volatile oil prices, Europe’s stagnant economy and a slowdown in China, Moody’s said.
Moody’s also lowered UTC’s junior subordinated notes rating from A3 to “Baa1” and its short-term commercial paper rating from “P-1” to “P-2.”
