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11 Dec 2008
Moody's affirms Aeroflex's CFR at B3; outlook remains positive
Approximately $710 million of rated debt affected
New York, December 11, 2008 -- Moody's Investors Service affirmed the debt ratings of Aeroflex
Incorporated ("Aeroflex"), Corporate Family and Probability
of Default Ratings at B3 and the Speculative Grade Liquidity rating at
SGL-2. The rating outlook is positive.
The affirmation reflects the company's solid revenue growth and
EBITDA expansion since the consummation of the August 2007 LBO despite
the difficult demand environment for semiconductors and test and measurement
products due to the economic downturn. Aeroflex demonstrated good
top-line revenue growth via expanded R&D investments and targeted
product development that enabled the company to move up the value chain
and make good progress towards broadening the applications for existing
technologies to expand into new end markets. In fiscal 2008,
the company achieved good customer uptake for new products in the wireless,
test and medical market verticals. The affirmation also considers
the modest improvement in leverage (as measured by debt to EBITDA) to
6.9x, good free cash flow (FCF) generation and the expectation
that leverage metrics will continue to improve due to continued EBITDA
growth and positive FCF generation applied to debt reduction.
The outlook is positive reflecting Aeroflex's exposure to the less
cyclical aerospace & defense (government) sector, well-diversified
product portfolio in which Aeroflex is the only (or principal) supplier
and a rich portfolio of new products expected to ramp and contribute to
revenues in 2009. Though Aeroflex's recent operating performance
metrics suggest a B2 rating, the rating agency expects sluggish
demand from wireless and networking commercial customers will impact the
company's revenues over the next several quarters. How the
company manages its operating performance during the economic downturn
over the next 6 -- 9 months will be an important factor in Moody's
analysis for a potential ratings upgrade.
The B3 corporate family rating (CFR) continues to reflect the company's:
(i) high financial leverage and thin credit protection measures;
(ii) modest footprint and limited asset protection from a small base of
pro forma tangible assets; (iii) potentially increasing competition
longer-term from larger and well-capitalized companies;
(iv) exposure to weakening wireless end markets; and (v) exposure
to aerospace and defense electronics end markets, which are currently
experiencing strong demand but could experience changes in procurement
policies or the types of products sourced by the government. The
rating also takes into account Moody's hybrid security treatment for the
$378 million of sponsor preferred-like member interests
in which 25% of the equity is treated as debt-like and 75%
is treated as equity-like. As such, Moody's adjustments
incorporate the commensurate increase in debt, equity and interest
expense on Aeroflex's balance sheet and income statement (please refer
to Moody's Rating Methodology for hybrids titled "Refinements to Moody's
Tool Kit: Evolutionary, not Revolutionary!" dated February
2005).
The B3 CFR also considers Aeroflex's leading market position as the primary
or sole source provider in niche markets, strong intellectual property
portfolio with proprietary technology, highly visible and diversified
revenue base with no specific defense platform exposure, relatively
stable competitive landscape, mission-critical nature of
its products with high switching costs resulting in stable gross margins
approaching 50% (Moody's adjusted) and consistent operating
profitability and positive free cash flow generation. The rating
considers Moody's expectation that Aeroflex's operating performance will
continue to benefit from a broadening of applications from existing technologies,
the secular outsourcing trend from primary contractors and increasing
dollar content as the company moves up the value chain in the satellite
and medical platforms. Despite relatively higher leverage (due
to the LBO), the B3 CFR also reflects the company's solid
EBITDA margins, EBITDA less capex/interest expense and FCF/debt
measures, which are better than its B3-rated peers and compensates
for its higher leverage.
The SGL-2 rating reflects Aeroflex's modest liquidity from
internal sources, which consists of $73 million of cash balances
and Moody's expectation of $17 million of FCF generation
in fiscal 2009. External liquidity is supported by full access
to a $50 million first lien revolver. Aeroflex is expected
to remain compliant with its financial covenants over the next year.
The following ratings were affirmed:
Corporate Family Rating -- B3
Probability of Default Rating -- B3
$ 50 Million Senior Secured First Lien Revolver due 2013 --
Ba3 (LGD-2, 21%)
$400 Million (First-Out) Senior Secured Term Loan due 2014
-- Ba3 (LGD-2, 21%)
$125 Million (First-Loss) Senior Secured Term Loan due 2014
-- B3 (LGD-4, 56%)
$135 Million Senior Subordinated PIK Loan Facility due 2015 --
Caa2 (LGD-6, 94%)
Speculative Grade Liquidity Rating -- SGL-2
The last rating action was on September 4, 2007 when Moody's
affirmed Aeroflex's B3 corporate family rating and positive outlook.
Aeroflex's ratings were assigned by evaluating factors we believe
are relevant to the credit profile of the issuer, such as:
(i) the business risk and competitive position of the company versus others
within the industry; (ii) the capital structure and financial risk
of the company; (iii) the projected performance of the company over
the near-to-intermediate term; and (iv) management's
track record and tolerance for risk. These attributes were compared
against other issuers both within and outside of Aeroflex's core
industry and Aeroflex's ratings are believed to be comparable to
those of other issuers of similar credit risk. Moody's subscribers
can find additional information in the Aeroflex Credit Opinion published
on Moodys.com.
Headquartered in Plainview, NY, Aeroflex is a specialty provider
of microelectronics and test and measurement products to the aerospace,
defense, wireless, broadband and medical markets. For
the twelve month period ended September 2008, revenues (Moody's
adjusted) and EBITDA (Moody's adjusted) were $646 million
and $148 million, respectively.
New York
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
No Related Data.
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