Fitch Affirms General Dynamics' 'A/F1' IDRs; Outlook Stable

NEW YORK, Oct 30, 2009 (BUSINESS WIRE) -- Fitch Ratings has affirmed General Dynamics Corporation's (GD) long- and short-term Issuer Default Ratings (IDRs) and outstanding debt ratings as follows: --Long-term IDR at 'A'; --Senior unsecured debt at 'A'; --Credit facilities at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'.

The Rating Outlook is Stable. Approximately $3.9 billion of outstanding debt is covered by these ratings.

GD's ratings reflect the company's: --Strong free cash flow; --Financial flexibility; --Solid credit metrics for the current ratings; --High defense spending levels; --Competitive position in business jets; and --Large backlog.

Rating concerns focus on: --Cyclical weakness in the business jet market; --Potential for large acquisitions or share repurchases; --Some risks to core defense spending after FY2010; --The impact of eventual declines in defense spending for operations in Iraq and Afghanistan; --A-12 litigation; and --GD's sizable pension deficit.

GD has $700 million of debt maturing in August 2010 as well as an $815 million 364-day revolver expiring in July 2010, but Fitch does not consider these to be significant credit issues because of GD's liquidity, cash flow, and access to the capital markets.

Liquidity as of Oct. 4, 2009 totaled $2.5 billion consisting of $1.4 billion in cash, the $815 million revolving credit facility that expires in July 2010 and a $975 million revolver that expires in December 2011, less $705 million of short-term debt and current debt maturities. For the latest twelve months (LTM) ending Oct. 4, 2009, leverage (gross debt-to-operating EBITDA) was 0.9 times (x) compared with 1.0x at the end of 2008 and 0.8x in 2007. Adjusting debt and EBITDA for operating leases, these ratios were 1.3x, 1.4x, and 1.2x, respectively.

GD's cash flow continues to support the company's ratings, but cash deployment exceeded free cash flow (cash from operations less capital expenditures and dividends) in 2008, and cash flow has declined so far in 2009. Free cash flow was approximately $2.1 billion in 2008, up from $2 billion in 2007. In the first three quarters of 2009 free cash flow was $664 million compared to $1.6 billion in 2008, with the difference largely attributable to lower advances. Fitch expects GD's 2009 free cash flow to be approximately $1.5 billion. Cash deployment remains Fitch's key credit concern given past acquisition activity, though this has moderated in the last couple of quarters. Share repurchases have also declined in 2009, with only $109 million in the first nine months, down more than $900 million.

Fitch expected the business jet market to decline in 2009, but the sector turned down more quickly and severely than anticipated. Industry deliveries fell 38% in the first half, and Fitch expects a 35%-40% decline for the year. An eventual peak-to-trough decline of 50% or more for the industry is not out of the question, including some additional declines in 2010. GD's business jet deliveries decreased 36% in the first nine months of 2009, which is what Fitch expects for the year, with most of the decline coming from midsize aircraft.

Fitch believes additional cuts are possible in 2010, mainly for GD's midsize models, although the revenue impact could be less for GD than some of its competitors due to the relative health of the large cabin segment.

GD's pensions were in an underfunded position of $2.9 billion as of the end of 2008, equivalent to a 62% funded position. Required pension contributions are not a credit issue in 2009, but they will likely increase in future years depending on pension performance and assumptions set in 2009. The impact of an increase in required funding would be mitigated by GD's strong cash flow, the company's ability to include some pension costs as allowable costs in some defense contracts, and by the deferred implementation of certain elements of the Pension Protection Act of 2006 for some defense contractors.

Fitch believes that fiscal 2010 is probably the peak in core U.S. defense budgets, and there are several risks to monitor in fiscal 2011 and beyond. These include the Obama Administration's first full budget in fiscal 2011, the Quadrennial Defense Review, and the large projected federal budget deficits in fiscal 2009?fiscal 2011. In addition to spending levels, some other changes proposed by the new administration could have a detrimental impact on GD and other defense contractors, including acquisition reform and the 'insourcing' of services previously contracted out by the DoD.

Additional information is available at www.fitchratings.com. The issuer did not participate in the rating process other than through the medium of its public disclosure.

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SOURCE: Fitch Ratings CONTACT: Fitch Ratings, New York Craig Fraser, [phone] Kathleen Connelly, [phone] or Cindy Stoller, [phone] (Media Relations) [e-mail] Copyright Business Wire 2009 -0- KEYWORD: United States

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New York INDUSTRY KEYWORD: Professional Services

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