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23 Mar 1999
MOODY'S ASSIGNS A B3 TO THE FAIRCHILD CORPORATION'S PROPOSED SENIOR SUBORDINATED NOTES AND A Ba3 TO ITS BANK CREDIT FACILITIES
Moody's Investors Service assigned a B3 rating to The Fairchild Corporation's (Fairchild) proposed $300 million senior subordinated notes due 2009 and a Ba3, pending completion of documentation, to its new credit facilities consisting of a $125 million revolving line of credit maturing 2005 and a $150 million term loan maturing 2006. The senior implied rating is B1 and the outlook is stable.
The ratings reflect Fairchild's high leverage, its low operating margins, the potential for lower volumes due to slowdowns in new aircraft production and softness in capital spending and the overall economy. The ratings also consider the purchase and divestiture of a number of operating entities in the recent past and the resulting lack of clear historical operating results, and the risks associated with the integration of Kaynar Technologies, Inc. (KTI). Supporting the ratings are the approximately 30% market share enjoyed by the combined entities, the ability to serve an increasingly global manufacturing base, and the margin improvements that KTI should bring to the combined companies.
The Ba3 ratings of the credit facility recognizes that the security and structure of the facilities provide the banks good protection in a distressed scenario. The facilities are supported by guarantees from and a pledge of all the capital stock and substantially all of the assets of the company's principal domestic subsidiaries and by a pledge of 65% of the stock and assets of the company's foreign subsidiaries. The credit facilities are guaranteed on a secured basis by the company's subsidiaries subject to the above mentioned limitations.
The B3 rating of the notes reflects both their contractual subordination to the credit facilities and the lack of collateral protection enjoyed by the credit facilities. The notes are guaranteed in a similar manner to the credit facilities but on an unsecured senior subordinated basis. Moody's notes that the company may, subject to debt incurrence tests, borrow up to an additional $200 million under the proposed indenture. Pro forma calculations for the purposes of compliance with debt incurrence tests will be provided in good faith by the responsible financial or accounting officer of the company.
The ratings reflect the company's high leverage and low operating margins. While Fairchild's December 27, 1998 pro forma ratio of debt to total capitalization is 51%, the company's return on assets (EBIT to total assets) is only 5.8%. Interest coverage is also weak with EBITDA to interest 2.2 times and EBITDA less capital expenditures to net interest 1.2 times. The low coverage ratios are a result, in Moody's opinion, of a low 9.5% operating ratio (EBIT to revenues). Of the two companies, Fairchild has the weaker operating ratio (6.1% actual year end June 30, 1998) when compared to KTI (15.6% actual year end December 31, 1998). Moody's anticipates that interest coverage ratios will benefit from a slower level of capital spending in 1999.
While the outlook is stable, Fairchild is weakly positioned in its rating category and subject to a number of factors that could, in Moody's opinion, significantly reduce cash flow debt coverage. The prospect of lower aircraft production is reflected in the ratings but the combination of reduced aerospace related revenues and a substantial downturn in industrial capital goods spending could negatively affect the company's revenues and cash flow. As a result, it is important, in Moody's opinion, for the integration of KTI to proceed quickly and effectively in order to achieve the expense savings anticipated. In addition, Moody's believes that it is important for Fairchild to quickly implement, in its own organization, the processing efficiencies that have provided KTI with its much higher operating ratios. A decline in the company's revenues, should it come before Fairchild has been able to significantly increase its interest coverage ratios, would place pressure on the current ratings.
Fairchild has, over the past several years, reorganized its business base through a series of acquisitions and sales of business units. As a result, it is difficult to compare actual historical performance to the anticipated results of the combination of Fairchild and KTI. While the pro forma balance sheets and cash flows reflect the market position and strength of the combined entity, it is Moody's opinion, that the success of the combined entities will be more than usually dependent, in the short term, on management's attention to the details of the integration rather than on future acquisitions.
Recognized in the ratings is the estimated 30% market share enjoyed by the combined Fairchild and KTI companies and the global capacity for servicing the global needs of both the aerospace and industrial manufacturing sectors. The company also benfits from the diversity of use of many of its parts in the aerospace aftermarkets and in defense and industrial applications. Aerospace primes and other major manufacturers continue to increase the number and dollar value of outsourced parts and components. This process increasingly includes international sources of supply. The coordination and standardization of parts across a variety of subcontractors is an increasingly complex and important task. Fairchild should be able to use its size and global reach to assist these companies in managing their global need for fasteners.
The senior subordinated notes are being sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.
Headquartered in Dulles, Virginia, The Fairchild Corporation (NYSE:FA) and Kaynar Technologies, Inc. (NASDAQ:KTIC) are leading worldwide aerospace and industrial fastener manufacturers and distribution logistics managers.
No Related Data.
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