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11 Dec 2002
CORRECTION TO TEXT: MOODY'S DOWNGRADES K&F'S SR SECURED FACILITIES TO Ba3; SR SUB TO B3
Moody's Investors Service has assigned a Ba3 rating to K&F Industries’ new $30 million 4½ year senior secured revolving credit facility, a B3 rating to its proposed $250 million 9 ¾% senior subordinated notes, due 2010, has withdrawn ratings on the existing senior secured credit facilities, and has downgraded the following ratings:
$185 million 9 ¼% senior subordinated notes to B3 from B2
Senior implied rating to B1 from Ba3
Unsecured issuer rating to B2 from B1
The ratings outlook is stable.
The rating assigned to the new senior secured facility and subordinated notes and the downgrade to all other existing ratings reflects the increased leverage resulting from K&F’s plans to re-capitalize the Company, wherein the Company intends to increase debt by $200 million (net), and distribute that amount to its two equity partners. K&F Chairman and CEO Bernard Schwartz and Lehman Investors each hold and, post-transaction, will continue to hold 50% equity interests in the Company.
The ratings also consider the Company’s modest size with respect to its revenue and asset base, limited product line, the high proportion of intangible assets (45% of total assets as of Sept. 2002), the majority of which is goodwill, and the negative net worth position. Moody's also notes the minimal limitation in the senior subordinated note covenants which would otherwise preclude a future re-capitalization.
Company debt totaled $238 million at September 30 2002, consisting of $4 million outstanding of the current $50 million revolving credit facility, and $49 million in existing term loan B, due 2005, as well as the $185 million senior subordinated note. After the re-capitalization, pro forma total debt will increase to $449 million, with the addition of the new $250 million senior subordinated notes, along with $14 million of the new revolving credit facility. After retiring the existing senior secured facilities and the $200 million equity distribution, debt/EBITDA will increase from 2.3x as of Sept. 2002 to pro-forma 4.3x. EBITDA coverage of interest will decline from 4.3x LTM Sept. 2002 to pro forma 2.3x for the same period.
However, the ratings are supported by the Company’s record of consistently strong operating performance and rapid debt reduction. Since the October 1997 re-capitalization, K&F has been able to reduce debt by $292 million (over 50%). During this period, the company’s revenue base and EBITDA have remained steady, averaging about $350 million and $115 million per year respectively. LTM Sept. 2002 EBITDA was $104 million, slightly lower than recent results, owing largely to weak conditions in the commercial aviation industry. The Company has maintained consistently high operating margins, as gross profit levels have ranged between 35% and 45% of sales from 1997 through 2001, and within this average in the last year (41% in LTM Sept. 2002). Cash flow before financing activities was approximately $90 million for LTM Sept. 2002, and averaged between $80 million to $125 million since 1998. CAPEX levels have been moderate, ranging between $5 million and $15 million between 1997 and 2001, less than 5% of revenues annually. Strong cash flows have enabled the company to reduce debt from $521 million ($336 million in senior debt) as of December 1997 to $238 million ($53 million in senior debt) as of Sept. 30 2002. Debt/EBITDA quickly reduced from 4.4x in 1998 to 2.5x in 2001. Likewise, EBITDA interest coverage improved from 2.6x to 4.2x in the same period (2.2x to 4.0x net of CAPEX).
The ratings also positively reflect the Company's position as one of the world's leading sole source suppliers of aircraft wheels, brakes and anti-skid systems, and aircraft fuel tanks for commercial and military aircraft, and the significant aftermarket portion of the business. The Company serves a large diversified customer base, with an installed base of over 28,000 aircraft. The U.S. Government is the single largest client with 21% of 2001 sales on an installed base of about 12,000 aircraft. The ratings further consider the Company’s technological expertise (only U.S. aircraft wheel and brake manufacturer to offer anti-skid brake systems), high barriers to entry, and the Company's focus on short haul/frequent take-off and landing aircraft, which require a higher level of replacement brake parts.
The stable rating outlook reflects Moody's expectations that earnings performance, while weaker, will continue to be sound despite the current soft economy and significant reduction in air travel. Moreover, Moody’s expects that free cash flow generated will largely be applied to reduce debt in a manner that K&F has exhibited in the past. However, Moody’s notes the generally negative business environment in the commercial aviation sector. As such, the ratings and the outlook are subject to downward pressure should demand exhibit prolonged weakness. Also, Moody’s notes that the ability to increase catalog pricing has contributed to the Company’s profitability from after-market sales. As such, the ratings and outlook may be subject to downward revision should a change in the competitive environment or customer procurement practices hinder the Company’s ability obtain increased pricing from after-market sales.
The Ba3 rating, and the positive notching on the secured credit facilities relative to the senior implied rating, reflects the benefits of the facilities' enhanced position by liens on substantially all of the assets of the Company's subsidiaries supporting their respective guarantees. The B3 rating on the senior subordinated notes reflect their junior ranking to senior indebtedness of the Company, both existing and in the future, and of other liabilities of the Company's subsidiaries. These notes are not guaranteed by the Company or any of its subsidiaries. Moody’s notes the potential for significant levels of additional debt that could be raised by the Company that would be senior to all subordinated note holders’ position.
K & F Industries, Inc., headquartered in New York City, is a leading manufacturer of wheels, brakes and brake control systems for commercial, general aviation and military aircraft through its subsidiary Aircraft Braking Systems Corporation (86% of 2001 revenues). In addition, the Company is the world's leading manufacturer of flexible bladder-type fuel tanks for aircraft through its subsidiary Engineered Fabrics Corporation (14% of 2001 revenues). 2001 revenues totaled $355 million.
No Related Data.
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