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Rating Action:

MOODY'S RATES ALTRA'S SENIOR SECURED NOTES B3; OUTLOOK STABLE

17 Nov 2004
MOODY'S RATES ALTRA'S SENIOR SECURED NOTES B3; OUTLOOK STABLE

Approximately US $165 Million of Debt Rated

New York, November 17, 2004 -- Moody's Investors Service has assigned the following new ratings to Altra Industrial Motion, Inc. ("Altra"), a manufacturer of mechanical power transmission products. The rating outlook is stable. The ratings are subject to review of the final documentation of the financing transactions.

New Ratings Assigned:

B3 for the $165 million senior secured notes, due 2011,

B2 senior implied rating,

Caa1 senior unsecured issuer rating, and

SGL-3 speculative grade liquidity rating.

Moody's does not rate the company's new $30 million asset-based revolver due 2009, nor the $14 million junior subordinated holding company PIK notes due 2019. Proceeds from the new notes, together with equity investments from Genstar Capital, a private equity firm, will be used to fund the acquisition of the power transmission business from Colfax for $180 million, as well as to repay the existing debt of Kilian, a small specialty bearing company that Genstar recently acquired from Timken and that will be combined with Colfax Power Transmission to form Altra.

The ratings are constrained by Altra's significant debt leverage, modest profitability and cash flow generation, as well as its substantial pension funding shortage. The ratings also reflect the highly competitive and mature nature of the mechanical power transmission industry, strong cyclicality in its end-markets, as well as the challenges posed by the gradual shift of US manufacturing base to lower-cost foreign locales. On the other hand, the ratings are supported by the company's good niche market position and strong brand recognition, established distribution channels, and some degree of end-market and geographic diversification of its revenue base.

Altra operates in the highly competitive and mature mechanical power transmission industry, which is estimated to be $29 billion in size globally. The company manufactures industrial clutches and brakes, enclosed gear drives, open gearing, couplings and other related products, which are sold to large OEMs as well as through distributors. End-markets include the material handing, turf & garden, transportation, and other general industrial sectors. As such, demand for Altra's products tends to fluctuate through the economic cycles and is driven primarily by industrial production and manufacturing activities in the US. In addition to the cyclicality in its end-markets, as US manufacturers increasingly shift their production base overseas, Altra, like many US-based component suppliers, face challenges posed by a contracting domestic customer base. However, following customers overseas also involves considerable risks. Not only does it incur incremental costs to set up operations overseas, but the retention of the OEM customers cannot be ensured either as the OEMs may expand their sourcing base to include local suppliers.

Moody's notes that despite its relatively small size, Altra has good market position in certain niche products such as clutches and gearings. Some of its brands, in particular Boston Gear and Warner Electric, have strong brand recognition in the industry. However, the mechanical power transmission industry is highly competitive and mature. Pricing power is generally low for component suppliers. As the large OEMs seek to consolidate their vendor base, the pressure for Altra to gain scale and expand its product offering is intense.

Pro forma for the transaction, Altra's total debt of $165 million will be approximately 5.1 times Moody's estimated EBITDA of $32.2 million for the LTM period ended September 2004. LTM EBIT and EBITDA would cover interest expense 1x and 2x, respectively. Given its modest profitability, high interest expense, and expected higher capex needs, Moody's expects the company's free cash flow (cash from operations minus capex) to range between $5 million and $9 million in the initial years. The free cash flow is negatively impacted by a substantial funding shortage of its pension liabilities, which are estimated to be approximately $17.1 million at end-2004, including a $14 million shortage at its US pension plans. Mandatory funding requirement is estimated to be $6 million for 2005 and $4 million for 2006.

Moody's expects Altra to have adequate liquidity over the next twelve months, as indicated in its SGL-3 speculative grade liquidity rating. The modest amount of operating cash flow that it is expected to generate in 2005 should be adequate to fund its capital spending and other operational needs. External liquidity is provided by the asset-based revolver with initial availability of roughly $30 million, which will be undrawn at closing. The revolver will have two financial covenants, e.g. a minimum fixed coverage ratio and a maximum annual capex amount. However, the covenants will not be tested when availability under the revolver is maintained at $12.5 million or above.

The B3 rating on the $165 million senior secured credit facility, at one notch lower than the senior implied rating, reflects the benefit of the collateral package as well as effective subordination to the senior secured revolving credit facility. The $165 million notes, consisting of approximately $125 million of fixed rate notes and $40 million of floating rate notes, are secured by a second priority lien on substantially all of the issuer's assets and those of its subsidiary guarantors. The notes are guaranteed by the issuer's domestic restricted subsidiaries.

Headquartered in Quincy, Massachusetts, Altra Industrial Motion, Inc. is a manufacturer of mechanical power transmission products, with pro forma LTM revenue of approximately $337 million.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Charles X. Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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