Fitch Affirms L-3 Communications' IDR at 'BB+'; Outlook Negative.

NEW YORK -- Fitch has affirmed the ratings of L-3 Communications Holdings, Inc. (LLL) and its wholly-owned subsidiary, L-3 Communications Corporation, as follows:

L-3 Communications Holdings, Inc.

--Issuer Default Rating (IDR) 'BB+';

--Contingent convertible notes 'BB'.

L-3 Communications Corporation

--Issuer Default Rating (IDR) 'BB+';

--Senior unsecured debt 'BBB-';

--Senior subordinated debt 'BB'.

The Rating Outlook is Negative. Approximately $4.7 billion of debt is affected by the ratings.

The ratings reflect continued high levels of defense spending, strong free cash flow (cash from operations less capital expenditures less dividends), strong organic growth, an ability to increase operating income at acquired companies, and expected growth in homeland security spending. The ratings also consider LLL's diversification within the defense and homeland security arenas, and the alignment between LLL's products and services and expected Department's of Defense (DoD) and Homeland Security (DHS) needs. Concerns focus on the potential for additional debt-funded acquisitions; potential changes in the DoD budget going forward; and outstanding legal issues. An additional concern is management succession as a result of the passing of founding Chairman and CEO Frank Lanza in June, but LLL continues to be supported by a deep management team and Fitch does not expect the company's strategy to change significantly when a new CEO is named.

Fitch's Negative Outlook reflects LLL's low credit metrics for the rating category combined with the potential for metrics to remain low given LLL's acquisition strategy, which Fitch expects will not be supported by equity issuance in the near-term. Also supporting the Negative Outlook is a potential $126 million litigation payment next year and LLL's willingness to continue making large percentage increases in dividends - 50% increase this year, but only an approximately $30 million increase to about $92 million in dividends projected for 2006. The ratings and the Outlook do, however, incorporate small-to-medium sized acquisitions and moderate dividend increases through 2007 without the issuance of equity.

High levels of U.S. defense spending continue to support LLL's ratings. The final fiscal 2007 DoD budget is expected to be largely in line with the president's request given only minor changes approved by the House and the Senate. The legislation is currently in conference so changes are still possible. The president's request of a 6.9% increase in modernization (procurement plus research, development, test and evaluation [RDT&E]), which is the most important part of the budget for defense contractors, exceeded Fitch's expectations.

Fitch continues to have concerns regarding future budgetary constraints and/or shifts within the defense budget. Large platforms are obvious targets for stretching production and/or reducing quantities ordered. As LLL is not a prime contractor for large platforms, its exposure is less than that of the large primes. In addition, LLL components are often used on both existing platforms and replacement platforms, so LLL normally realizes upgrade work on existing platforms when replacement platforms are delayed or cancelled. Fitch also believes that LLL's growing portfolio of services is in line with the DoD's outsourcing goals and its products are also in line with DoD objectives, as validated by management's expected organic growth at the high end of the 8-10% range in 2006 after achieving 11.6% in 2005. LLL's diverse contract portfolio, with approximately 1,500 contracts exceeding one million dollars in value and none greater than 4.5% of revenues, minimizes the impact of losing any given contract.

The loss of revenues that could result from an end to the conflicts in Iraq and Afghanistan is also a concern, but the impact would not be immediate as Fitch expects that resetting equipment to combat status could take up to four years. This lag should allow LLL to adjust to changes in resultant funding. Fitch also believes that some of the funding for these conflicts may be shifted to DHS, where LLL is well-positioned.

LLL has made approximately $1 billion in acquisitions since the TTN acquisition, when Fitch initially revised the Rating Outlook to Negative. This level of acquisition spending is more than Fitch had anticipated at the time of the outlook revision, but free cash flow, even with the approximately $30 million increase in dividends, has also exceeded Fitch's expectations. As such, LLL issued only a minimal amount of debt to fund the acquisitions. There have not been any sizable acquisitions announced since Mr. Lanza's passing, but during its second quarter earnings call in July management indicated that it was looking at two potential transactions in the $500-800 million range as well as smaller ones. Should either of these large transactions occur, Fitch will review the ratings at that time.

LLL faces several outstanding legal issues which by themselves are not likely to trigger a ratings action, but could be a factor if further debt financed acquisitions exceed Fitch's expectations. In May, OSI Systems, Inc. was awarded $126 million for litigation with LLL regarding a contract to sell assets to OSI. LLL has filed a motion seeking summary judgment in its favor and barring that will appeal the verdict. Should LLL be unsuccessful, it does not expect to pay the judgment before 2007. OSI is also seeking pre-judgment interest and the transfer of certain businesses to OSI.

The former TTN is under investigation by the General Services Administration and the Department of Justice regarding billing rates and information technology services, respectively. Another LLL subsidiary remains under criminal investigation by the Army related to manufacturing deficiencies of a component supplied by a vendor and the subsidiary's actions when it became aware of the potential problem. LLL is cooperating fully with these investigations and Fitch does not expect the outcomes to have a material impact on the firm. Another subsidiary is in litigation regarding the conversion of 747 aircraft to freighter configuration. Kalitta Air is claiming $235 million in damages. LLL believes that it not only has meritorious defenses but that Kalitta has recovered sufficient compensation from other parties. LLL's insurance carrier has accepted defense in the matter, but has reserved the right to dispute its obligations in the event of an adverse result.

In the second quarter, LLL took a $39 million charge as the result of a voluntary review of its historical stock-based compensation award practices and related accounting treatment from the completion of LLL's IPO in May 1998 to July 2003. Fitch does not consider the situation to be material to LLL's ratings at this time, nor does Fitch believe that the situation indicates problems with overall corporate governance.

As of June 30, 2006 LLL had a liquidity position of approximately $1 billion, consisting of $184 million of cash and $845 million in revolving credit facilities, net of $68 million in drawings and $87 million utilized for letters of credit. With no long term debt maturities before 2010, LLL's capital structure provides the company with significant financial flexibility.

LLL's credit metrics remain weakened by the TTN acquisition. However, despite the $1 billion in subsequent acquisitions, LLL has only modestly increased debt, utilizing free cash flow and cash on hand to fund the bulk of the acquisitions. As such, Fitch believes that pro forma leverage and interest coverage ratios have improved slightly over the last twelve months (pro forma EBITDA is not available). L-3 Communications Corporation leverage ratio (including LLL's contingent convertible notes, which it guarantees pari passu with its own senior subordinated debt) as defined by Debt to EBITDA and adjusted debt to EBITDAR, was 3.5 times (x) and 3.8x, respectively, for the twelve months ending Jun 30, 2006, declining from 4.0x and 4.4x, respectively, for full year 2005 and declining from 4.4x and 4.8x, respectively, for the twelve months ending Sept. 30, 2005 (which was the first quarter end that included TTN and its associated debt). Interest coverage (also including debt at LLL), as defined by EBITDA/interest was 5.0x for the twelve months ending June 30, 2006, declining from 5.6x in full year 2005, and 6.0x for the twelve months ending Sept. 30, 2005.

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.