Honeywell's ratings under scrutiny following business separation announcement - Fitch
Investing.com -- Fitch Ratings has placed Honeywell International Inc (NASDAQ: HON ).'s ratings, including its Long- and Short-Term Issuer Default Ratings (IDRs) of 'A' and 'F1', on Rating Watch Negative (RWN). This decision is in response to Honeywell's plan to separate its Aerospace Technologies (AT) and Automation businesses. This rating watch applies to all the company's rated debt.
Fitch plans to resolve the RWN by either confirming or downgrading the ratings once the details about the separation are determined. The separation is expected to take place in the second half of 2026.
The RWN reflects the uncertainty surrounding Honeywell's future capital structure, financial policy, and capital deployment priorities due to the pending separation into two independent, publicly traded companies. Honeywell's management has expressed its intention to maintain strong investment-grade ratings post-separation.
Fitch has evaluated the standalone operating profiles for each of the two businesses as having 'A' category characteristics after their separation. However, each business will be more concentrated in their respective end markets. Both the AT and Automation businesses will continue to have substantial scale within their markets and remain highly competitive due to their advanced technological capabilities.
The decision to separate the AT and Automation businesses is in addition to the previously announced spinoff of the Advanced Materials (AM) business by early 2026 and the sale of the Personal Protective Equipment (PPE) business, expected to be completed in the first half of 2025.
In 2024, Honeywell completed several significant acquisitions, at valuations totaling approximately $9 billion. These acquisitions have expanded Honeywell's product line and increased its software and digital content, which is expected to boost recurring and aftermarket revenue.
Honeywell's pre-spinoff credit profile shows solid free cash flow (FCF) through business cycles, consistent profitability, well-established competitive positions across end markets, and large scale. Fitch expects this strategy to continue following the completion of pending business exits.
Honeywell's financial flexibility provides capacity to manage leverage over the long term. Gross debt/EBITDA was 3.5x at Sept. 30, 2024, above Fitch's negative rating sensitivity in the mid-2x range. High cash balances resulted in net leverage of 2.3x at Sept. 30, 2024.
Honeywell has significant capacity to manage discretionary spending for share repurchases, and its profitability is less sensitive to cycles than many companies in the diversified industrial sector. Other sources of liquidity include proceeds from divestitures, including the future monetization of Honeywell's interest in Quantinuum, although the timing has not yet been determined.
As of Sept. 30, 2024, Honeywell's asbestos liabilities totaled $1.3 billion net of insurance receivables, primarily related to the legacy Bendix business. Environmental liabilities totaled $685 million as of Sept. 30, 2024 and have been relatively steady as payments roughly offset new claims.
Fitch expects Honeywell to follow its existing operating and financial strategies until the planned separation is completed. Factors that could lead to removing the RWN and assigning a Stable Outlook include completion of the AT and Automation separation and establishment of appropriately capitalized balance sheets, as well as credit-conscious capital deployment priorities.
On the other hand, factors that could lead to a Negative Rating Action/Downgrade include an extended economic downturn leading to long-term deterioration in Honeywell's profitability, cash flow, and leverage, or the establishment of less conservative balance sheets and more opportunistic capital deployment priorities.
As of Dec. 31, 2024, liquidity included $10.6 billion of cash and $375 million of short-term investments, a $4 billion revolving credit facility that matures in 2029, and a $1.5 billion 364-day credit facility. This was offset by $4.3 billion of commercial paper and short-term borrowings and $1.3 billion of current maturities of long-term debt. Other debt maturities are distributed through 2064.
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