Fitch Ratings Affirms Honeywell; Comments on Proposed Acquisition.

NEW YORK -- Earlier today, Honeywell International (HON) announced it had reached an agreement to acquire Novar plc for approximately $2.4 billion, including the assumption of $580 million of debt, net of cash. Completion of the proposed transaction would not affect Fitch's ratings for HON. As a result, Fitch affirms HON as follows:

-- Senior unsecured debt 'A+';

-- Credit facility 'A+';

-- Commercial paper 'F1'.

The Rating Outlook is Stable. Approximately $5 billion of debt is covered by the ratings.

Novar's Intelligent Building Systems (IBS) will be integrated into HON's Automation and Control Solutions (ACS) business. However, HON plans to divest Novar's aluminum and check printing businesses, which HON estimates could bring as much as $1.0 billion-$1.5 billion. The Novar acquisition is expected to be completed during the first quarter of 2005, and the related divestitures could be concluded later in 2005.

While the transaction would be larger than the size of the transaction that Fitch had expected HON to pursue, Fitch believes that Novar is a manageable acquisition for HON. HON has indicated it will use existing cash balances to fund the transaction. Although HON's cash balances will be substantially lower after the acquisition, it will still have adequate operating cash and borrowing capacity in Fitch's opinion. Credit concerns related to the proposed transaction include integration risk, the uncertain timing of the aluminum and printing divestitures, and the potential emergence of other bidders who could push up the price. These concerns are offset by the additional EBITDA and cash flow provided by IBS, as well as an improved competitive position through a stronger presence in Europe.

HON's ratings reflect the company's financial flexibility, strong cash flow, diversification, relatively modest pension deficit, leading market positions and technology portfolio, the recovery in the high-margin commercial aerospace aftermarket business, and the improving outlook in most of HON's non-aerospace businesses. The benefits of HON's ongoing productivity program also support the company's ratings. Concerns focus on the susceptibility of the company's end markets (particularly commercial aerospace) to shocks, low credit statistics relative to similarly rated companies, and lingering asbestos litigation, a risk that is mitigated by substantial insurance coverage and the possibility of settlements. Failure to complete asbestos litigation settlements or an inability to collect insurance for asbestos liabilities could lead to a re-evaluation of the ratings and Outlook.

Liquidity at Sept. 30, 2004, was $5.5 billion, consisting of $3.4 billion in cash and $2.3 billion of credit facilities, offset by $198 million of short-term debt and current maturities. For the latest 12 months (LTM) ended Sept. 30, 2004, leverage as defined by total debt-to-EBITDAP was 1.4 times (x), down from 1.6x at the end of 2003. Debt has been relatively stable while EBITDAP has benefited from revenue growth and modestly higher margins due to the improving business environment. Similarly, LTM interest coverage improved to 10.0x, compared with 9.1x in 2003.