S&P upgrades Amentum rating to "BB" due to debt repayment, outlook stable

Investing.com – S&P Global Ratings upgraded the rating of Amentum Holdings Inc. from “BB-” to “BB” on Friday, citing strong operational performance and debt repayment. The outlook remains stable.

The upgrade reflects Amentum’s deleveraging achieved through ongoing project execution and debt repayment. The company voluntarily repaid $750 million of term loan debt in fiscal year 2025 ending October 3, 2025, including $200 million in the second quarter and $550 million in the fourth quarter, with the deleveraging pace meeting S&P’s upgrade criteria.

As of the end of the first quarter, Amentum’s backlog exceeded $47 billion, up from $45 billion in the same period last year, with $23 billion in pending orders. This provides visibility into demand over the coming years and reassures S&P that demand will remain sufficient to support continued deleveraging into 2026.

The company’s first quarter ending January 2, 2026, coincided with a 43-day government shutdown, along with divestments of rapid solutions business and deconsolidation of joint ventures, leading to a 5% year-over-year revenue decline to $3.2 billion. Reported EBITDA was $263 million, and reported free operating cash flow was negative $142 million, reflecting the impact of the government shutdown.

Despite a slow start this year, S&P expects performance to improve and for deleveraging to continue into fiscal year 2026. The agency anticipates seasonal increases in government service activity, with revenue, EBITDA, and free operating cash flow more concentrated in the second half of the year.

Based on S&P’s calculations over the past 12 months, Amentum’s adjusted debt-to-EBITDA ratio at the end of the first quarter was 3.7x. S&P forecasts a leverage ratio of 3.2x by the end of fiscal year 2026. If Amentum uses part of its free operating cash flow to repay debt (which the company mentioned as part of its capital allocation strategy during its recent earnings call), the leverage ratio could be better than expected.

Congress recently approved an $890 billion defense budget for fiscal year 2026. After coordination, U.S. defense spending for FY2026 could exceed $1 trillion. S&P believes Amentum is well-positioned in aircraft platform, base support, and environmental remediation budgets, as well as in space sectors, including communications and missile defense systems.

In the coming years, Amentum’s growth may include commercial and government demand in space, digital infrastructure, and nuclear energy, balancing its core government business, including aircraft maintenance, environmental remediation, and military base logistics.

Amentum expanded its nuclear business through the acquisition of Jacobs CMS, which supports the construction of UK nuclear reactors and enables bidding on U.S. nuclear reactor projects. The current U.S. government has outlined strategic importance in improving energy infrastructure to meet data and AI output demands.

S&P expects full-year revenue for FY2026 to decline 1%-2% to approximately $14.2 billion, reflecting the ongoing execution of recently awarded contracts but offset by divestments and deconsolidation of joint ventures. The agency forecasts that as Amentum continues executing backlog projects, revenue in FY2027 will grow 5%-7% to about $15 billion. S&P also expects adjusted EBITDA margins to improve to around 8%, driving reported free operating cash flow to approximately $550 million in FY2026 and $700 million to $750 million in FY2027.

Based on these assumptions, S&P projects an adjusted debt-to-EBITDA ratio of 3.2x in FY2026 and 3.1x in FY2027, consistent with a “BB” credit rating. Future capital allocation by Amentum remains uncertain, especially regarding potential shareholder distributions in the coming years. Due to the executive order issued on January 7, 2026, S&P believes U.S. defense contractors may face restrictions on share repurchases and dividends.

S&P’s forecast includes a $1 billion combination of share repurchases and dividends starting from FY2027. Excluding these distributions, the agency estimates a leverage ratio of 2.5x for FY2027. S&P estimates that the company’s long-term target of 3x leverage, adjusted, is approximately 3.25x. The agency believes the company needs to adopt a more conservative financial policy to consider a higher rating.

The stable outlook reflects S&P’s expectation that Amentum will maintain credit metrics consistent with its rating as it expands into commercial end markets and continues to benefit from strong defense spending.

If debt-to-EBITDA deteriorates above 4x, S&P may downgrade Amentum’s rating. This could occur if the company fails to win new business in line with forecasts to offset potential contract losses, or if contract delays or protests postpone EBITDA generation, or if it undertakes more aggressive shareholder distributions or debt-financed acquisitions.

Conversely, if debt-to-EBITDA improves and remains below 3x, S&P may upgrade Amentum’s rating. This could happen if the company improves its business mix and contract execution, or expands into higher-margin activities (either organically or through acquisitions), increasing EBITDA margins toward higher-rated peers, or adopts a more conservative financial policy, including lowering net leverage targets.

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