Fitch Ratings Upgrades Raytheon's Senior Debt to 'BBB'.

NEW YORK -- Fitch Ratings has upgraded Raytheon Company (RTN) as follows:

--Senior unsecured debt to 'BBB' from 'BBB-';

--Bank facility to 'BBB' from 'BBB-';

--Commercial paper to 'F2' from 'F3'.

RC Trust I

--Trust preferred securities to 'BBB-' from 'BB+'.

The Rating Outlook is Stable. Approximately $5.5 billion of debt is affected by these actions.

The upgrades are based on RTN's substantial debt reduction in the past eighteen months, improved credit statistics, solid performance in RTN's government and defense businesses, the recovery in the business jet market, and improved operating performance at Raytheon Aircraft (RAC). In addition, RTN has reduced its risks related to lawsuits, regulatory investigations, and the company's former Engineers & Constructors (E&C) segment. The upgrades also incorporate RTN's balanced cash deployment plan, which includes additional debt reduction and pension contributions.

RTN's ratings reflect the competitive position of the company's defense businesses, high levels of U.S. defense spending, strong backlog, and liquidity position. Concerns center on rising risks within the Department of Defense (DoD) budget due to the Quadrennial Defense Review (QDR), "transformation," and DoD leadership changes; increasingly shareholder-focused cash allocation; and uncertainty regarding the company's Chief Financial Officer position.

Debt reduction is the main driver of the rating actions. RTN lowered its debt by $4.4 billion in the past four years, including $2.2 billion in 2004. In late 2004, RTN established a balanced cash deployment plan that includes approximately $500 million of debt reduction per year over the next three years, which the company should be able to achieve through the retirement of maturing debt. RTN also plans to make discretionary pension contributions of $200 million annually for the next few years to improve its pension deficit, which was $3.6 billion at the end of 2004. The cash deployment plan through 2006 also includes shareholder-focused actions such as dividend increases and a $700 million share repurchase program. Fitch believes that RTN will be able to carry out these actions using free cash flow (cash from operations less capital expenditures), which Fitch expects to be in the range of $1.3 billion to $1.5 billion per year during the next few years.

Although RAC's margins are among the lowest in the general aviation industry, the segment's financial performance has improved, and Fitch now believes RAC will not be a significant drag on RTN's financial performance. RAC's revenues grew 16% in 2004 and operating margins were 2.6% compared to break-even margins in 2003 and losses in 2001 and 2002. RAC's free cash flow in 2004 was $134 million. RAC's better performance is the result internal efforts to improve operating effectiveness and the recovery in the business jet market. Fitch considers the business jet market to be the commercial aerospace industry's strongest segment in 2005, with unit deliveries up at least 15-20%. RTN expects RAC's sales to rise at least 7% in 2005 with operating margins around 4%. Fitch believes these estimates are consistent with the market environment. Two near-term risks for RAC are the final certification of the Hawker Horizon and the expiration of a union contract this summer.

Fitch's previous concerns about contingent liabilities have been lessened by several recently completed or pending settlements totaling less than $500 million. In late 2004 and early 2005, RTN settled several class action securities lawsuits, including one in which the company agreed to pay $210 million cash and to provide warrants worth $200 million to the plaintiffs. RTN also offered to settle a SEC investigation into accounting practices at RAC. The $12 million offer still has to be approved by the SEC, but approval has been recommended by the SEC staff. The SEC continues to investigate RTN's CFO, who has been placed on administrative leave.

RTN's government and defense businesses, which accounted for 74% of revenues in 2004, continue to benefit from the strong defense spending environment. Sales grew 11% in 2004, and operating margins rose to 10.9% from 9.3%, with the Network Centric Systems segment providing much of the improvement. These businesses also saw strong order growth with backlog increasing nearly 20% versus 2003. Although Fitch believes that the strongest DoD growth is in the past, absolute spending levels are high and are not expected to decline in the next several years. Fitch believes that the DoD budget will continue to rise in the next few years, but at a decelerating rate. While the size of the U.S. defense budget is a positive for defense industry credit quality, Fitch is increasingly concerned that there are program risks within the budget as the DoD evaluates spending priorities in the context of "transformation." RTN could be better insulated from DoD budget changes than some other defense contractors because of its focus on electronics rather than platforms.

At March 27, 2005, RTN had a liquidity position of $1.6 billion, consisting of $457 million of cash and $1.7 billion of availability under its $2.2 billion credit facility, offset by $566 million of non-bank short-term debt and current debt maturities. RTN's debt-to-EBITDAP ratio for the last twelve months ending March 27, 2005, was 2.3 times (x) compared to 2.2x for 2004 and 3.5x in 2003. The slight increase for the last twelve months was related to seasonal cash outflows in the first quarter. With additional debt reduction in 2005, Fitch believes that RTN's debt-to-EBITDAP ratio could approach 2.0x by the end of the year. Interest coverage improved to 6.4x for the last twelve month period compared with 5.5x in 2004 and 3.9x in 2003.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.