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Rating Action:

MOODY'S DOWNGRADES FAIRCHILD CORPORATION'S SECURED BANK FACILITIES TO B1 AND THE $225 MILLION 10 3/4% SENIOR SUBORDINATED NOTES TO Caa1

14 Nov 2001
MOODY'S DOWNGRADES FAIRCHILD CORPORATION'S SECURED BANK FACILITIES TO B1 AND THE $225 MILLION 10 3/4% SENIOR SUBORDINATED NOTES TO Caa1

Approximately $470 Million of Debt Securities Affected.

New York, November 14, 2001 -- Moody's Investors Service downgraded the ratings of The Fairchild Corporation. The ratings affected were:

$244 million senior secured bank facility to B1 from Ba3,

$225 million 10.75% senior subordinated notes due 2009 to Caa1 from B3,

Senior implied rating to B2 from B1, and

Issuer rating to B3 from B2.

The rating outlook was changed to negative.

The ratings downgrades is precipitated from the projected major cut-back in commercial aircraft production expected as a result of the deteriorating fundamentals of the airline industry with the sharp decrease in travel following the September 11 attack. The substantial cut-backs in commercial aircraft production announced by both Boeing and Airbus from the levels previously expected will adversely impact Fairchild's future results and will reverse the improvement in aerospace fastener demand experienced earlier this year and in the just completed quarter ended September 2001 (first quarter of fiscal 2002). Backlog as of the end of fiscal year 2001 ended June 30 had increased by 7.7% to $220 million as orders exceeded sales and the book-to-bill ratio improved to 106%. Backlog at September 30 showed a small increase to $222 million, but the book-to-bill ratio slipped slightly from the year earlier period. Aerospace fasteners accounted for 86% of nets sales in fiscal 2001 and while the company has significant sales to the aerospace defense, industrial and after-markets, its revenue is still primarily tied to the level of commercial aircraft builds, particularly at Boeing. Approximately 77% of sales are domestic.

The rating downgrades also reflect the company's weak operating results not withstanding the now increased concern related to commercial aircraft build rates. For fiscal year 2001, operating income totaled only $21.3 million, down 8.3% from year 2000's already less than strong results, and noticeably less than Moody's expectations. Interest coverage remains weak with consolidated adjusted EBITDA-to-cash interest for the year at only 1.4x ($73 million/$51.1 million) and to EBITA of 0.8x. The company's financial flexibility is limited as evidenced by the minimal room under their most restrictive bank agreement covenant, namely, EBITDA-to-Interest (as defined in the bank credit agreement) minimum requirement of 2.00x versus the June 30, 2001 actual of 2.05x. The company expects to stay in compliance throughout fiscal 2002 despite the now less favorable revenue picture for the year than earlier expected. Moody's notes that distributions from unrestricted subsidiaries are included in the definition of EBITDA used in the agreement, thus providing Fairchild a degree of discretion and control. Covenant compliance is necessary to maintain access to the $100 million revolving credit ($64.6 million of loans and $15.5 million of letters of credit outstanding at June 30, 2001).

Further, the rating downgrade took into consideration that the balance sheet improvement expected by Moody's during fiscal 2001 did not materialize with year-end debt of $497 million against loss deflated book equity of $362 million with goodwill of $419 million and Debt-to-adjusted EBITDA of 7.0x.

Moody's notes that real estate investments, including the Farmingdale shopping center, which collectively represent a significant proportion of the company's asset base ($110 million out of $1,210 million), continue to generate inadequate returns despite an increase in rental revenue at Farmingdale. 74% of the developed shopping center was leased to tenants as of June 30, 2001. Moody's believes that timely liquification of these assets is critical to improving the company's return on capital employed and reducing the high level of leverage to more acceptable levels.

The rating outlook was revised to negative, reflecting the increasingly difficult operating environment and the significant uncertainty at this time about the degree and duration of the downturn in commercial aircraft manufacturing.

Moody's, however, also notes that Fairchild's revenue base is more a function of the type-mix of aircraft manufactured rather than the absolute numbers per se, given the company's higher content and penetration in the larger twin-aisle models. Production cut-backs and timing are not expected to be uniform across model types and could advantage Fairchild. In addition, full implementation of the company's min-max inventory management program with Boeing and its program of plant consolidations and other cost-cutting measures should provide earnings growth which could lead to improvement in the rating outlook.

Headquartered in Dulles, Virginia, The Fairchild Corporation is the leading worldwide manufacturer and supplier of precision fastening systems (primarily to OEMs) used in the construction and maintenance of commercial and military aircraft, a distributor of aerospace parts, and an operator of a shopping center in Farmingdale, New York.

end

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Andris G. Kalnins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

No Related Data.
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