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