Fitch Lowers Ratings for Textron/Textron Financial to 'A-'

Business Wire, March 27, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--March 27, 2003

Fitch Ratings has lowered the ratings on Textron Inc.'s (TXT) senior unsecured debt and bank facilities to 'A-' from 'A', preferred securities to 'BBB ' from 'A-', and short-term debt to 'F2' from 'F1'. Fitch has also lowered the ratings on Textron Financial Corp.'s (TFC) senior unsecured debt and bank facilities to 'A-' from 'A', preferred securities to 'BBB ' from 'A-', and short-term debt to 'F2' from 'F1'. Due to the existence of a support agreement and other factors, Fitch views TFC's ratings as being linked to the parent's ratings. The Rating Outlook remains Negative. Approximately $7.1 billion of debt and preferred securities are covered by the rating actions.

The rating actions reflect lower business jet deliveries at Cessna, the continuing weak business environment in TXT's other segments, and TFC's diminished financial performance. Because of these factors Fitch does not expect TXT's credit protection measures to improve in 2003 as much as previously anticipated. The Negative Rating Outlook assumes continued pressure from the prolonged cyclical downturn in TXT's industrial businesses, as well as the weak business jet outlook. The effects of the weak economy are partially offset by TXT's restructuring program, which ultimately could generate annual savings of approximately $400 million, and lower interest expense resulting from debt reduction in 2002. Continued weakness at TFC could also pressure TXT's credit quality given the support agreement between TXT and TFC.

TXT's debt ratings consider the company's diverse portfolio and market-leading positions, lower debt levels resulting from divestiture proceeds, solid liquidity position, and ongoing restructuring program, which drove improved margins in three of the manufacturing segments in 2002. Concerns center on the challenging economic environment, the business jet market, softer profits at TFC, and uncertainty about the V-22 tilt-rotor program. Fitch also is concerned with the future uses of discretionary cash flow, which likely will not include de-leveraging.

TXT's liquidity as of December 28, 2002, excluding TFC, was $1.76 billion, consisting of $286 million in cash and $1.5 billion of credit facility availability, offset by $25 million in current maturities and short-term debt. TXT improved its credit statistics in 2002 compared to 2001, as restructuring efforts and debt reduction offset the weakness in TXT's cyclical business units. However, TXT's credit statistics are still well below 2000 levels. Fitch conservatively includes TXT's trust preferred securities in the calculations of debt and interest expense, although Fitch acknowledges certain equity-like benefits that these securities add to TXT's capital structure. TXT's Debt to EBITDAP ratio, excluding TFC, was 2.6x for 2002, compared to 2.7x and 1.8x for 2001 and 2000, respectively. Interest coverage for 2002 was 5.3x, compared to 4.3x and 7.8x for 2001 and 2000, respectively. Fitch expects TXT's credit statistics to improve modestly in 2003, with minimal debt reduction and continued economic weakness limiting the improvement. However, free cash flow generation should improve financial flexibility.

TFC's profitability measures came under pressure in 2002 due to higher credit costs and an after-tax $15.4 million goodwill impairment charge in connection with the adoption of SFAS 142, as well as the commenced realignment/exiting of some of its businesses. As such, the company's 23 consecutive years of earnings growth ended in 2002. The impairment charge relates to the valuation of the franchise finance division and is primarily the result of declining loan volumes and an unfavorable securitization market for this type of receivable. Net income in 2002 was $60 million, 50% lower than in 2001.

The quality and level of TFC's capital base has steadily weakened and has become an increased focus. With the expansion of the receivables portfolio since year-end 1998, TFC's leverage has sequentially increased. Managed debt-to-tangible equity has progressively risen over the past three years from 7.54x at year-end 1999, to 8.90x at Dec. 28, 2002. The growth in receivables coupled with the low rate of internal capital formation has caused leverage to increase over the years. In addition, in light of TFC's acquisition and asset securitization activities, the quality of the company's equity base has declined. Acquisition-related goodwill and securitization-created assets accounted for 52% of equity at Dec. 28, 2002, up from 15% at the end of 1998. Fitch expects leverage to improve slightly over the next year with the anticipated slowing growth in receivables and smaller dividends to TXT. However, leverage remains high for the current rating category given the existing business mix.

The relationship between TFC and Textron is governed by a support agreement. The support agreement requires that TXT maintain TFC's net worth and fixed charge coverage at $200 million and 1.25 times (x) or higher, respectively, at all times.