Credit rating woes besiege local defense contractors.

Credit rating woes besiege local defense contractors

Credit ratings of most of Los Angeles County's major military contractors continue to decline as the defense budget is cut, affecting the companies' ability to borrow money and instill investor confidence.

And the long-term prognosis for most of them is that their ratings will continue to fall, according to the two largest credit rating agencies, Moody's Investors Service and Standard & Poor's Corp., which are both based in New York City.

The county's best-rated defense-oriented company is El Segundo-based Rockwell International Inc., which both analysts and investors have praised for its early diversification into other fields and for its management.

Among the worst-rated companies is McDonnell Douglas Corp., the St. Louis-based contractor that operates Douglas Aircraft Co. in the Long Beach. McDonnell Douglas, the country's largest defense contractor, has been particularly hurt by the declining defense budget and developments like the cancellation of a major military project earlier this year, analysts have said.

As further indications of the company's problems, the Douglas Aircraft-produced C-17 military cargo plane continues to be plagued by production delays and cost overruns and now it's uncertain when it will make its first flight. In addition, Singapore Airlines recently canceled an order for the Douglas-produced MD-11 widebody commercial aircraft.

In the last 18 months, Standard & Poor's has reduced the long-term debt rating of McDonnell Douglas three times, to BBB from A. "It's been lowered for a combination of reasons, from a weaker industry to poor company fundamentals that have made it a weaker company," said Roman Szuper, an S&P assistant vice president who follows the defense industry.

An indication of the weakened defense industry are the modest ratings of Lockheed Corp. Many investors have perceived the Calabasas-based giant as a strong company because this past April it led a team of companies that won a contract to build a new fighter plane that could be worth up to $95 billion in new business.

But Moody's gives Lockheed's senior debt a Baal rating (its fourth highest out of seven rating levels) and S&P gives the company an A rating (the highest rating is AAA) on long-term debt. S&P gives Lockheed a negative ranking on its long-term ratings outlook.

A company that is not rated by either agency is Northrop Corp., which has its headquarters in Century City and major facilities in El Segundo, Hawthorne and Pico Rivera.

Theres no rating because the company has no long-term public debt. But that does not necessarily make Northrop a strong company, as analysts have noted. They have said that Northrop relies too heavily on just a few big military projects, including the controversial B-2 bomber program, for its revenues. In addition, Northrop suffered a major setback when it lost the contract for the new jet fighter to the team led by Lockheed.

Last year, Northrop had sales of $5.4 billion compared to $5.2 billion in 1989, and net income of $210 million in 1990 versus a loss of $81 million in 1989.

On the S&P list of defense companies, Rockwell has the best rating after Boeing, the giant Seattle-based company that is primarily known as a commercial aircraft manufacturer. About 25 percent of Rockwell's business is from the Pentagon and, unlike other contractors, it's increasing the percentage of its total revenues that comes from the Department of Defense.

Szuper said Rockwell has an A-1+ rating on its commercial paper and a stable ratings outlook. Mostt of the other county contractors do not carry a ratings outlook or have a negative forecast by S&P.

Moody's does not cover Beverly Hills-based Litton Industries Inc., which in recent years has been cutting back on its military work, but S&P gives it an A- rating on long-term debt, an A-1 on commercial paper and a negative long-term ratings outlook.

The only rating for Los Angeles-based Hughes Aircraft Co., one of the county's largest defense contractors, is an A-1 by S&P on the company's commercial paper.

General Dynamics Inc. is the second-biggest defense contractor in the country and is based in St. Louis but has manufacturing facilities in Pomona where it builds missiles for the military. Moody's rates General Dynamics' debt at Baal. S&P gives GD's long-term debt an A-rating, its commercial paper an A-2 ranking and says the company's long-range ratings outlook is stable.

Szuper said Boeing is the only major defense or aerospace contractor whose S&P credit ratings has improved over the past two and a half years - to AA from AA-.

At Moody's, industry analyst Tassos Phillppakos said in a June report, "In the 1990s, the aerospace industry will face an onslaught of production consolidations, alliances, mergers and acquisitions. Additional rating downgrades are expected but Moody officials said they believe that most major adjustments have already taken place and that the ratings presently incorporate the industry's worsening credit quality."