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Rating Action:

Moody's affirms MRO Holdings B2 CFR, new term loan assigned B2, outlook stable

15 May 2019

New York, May 15, 2019 -- Moody's Investors Service ("Moody's") affirmed ratings for MRO Holdings, Inc ("MROH") including the B2 Corporate Family Rating (CFR) and the B2-PD Probability of Default Rating. Concurrently, Moody's assigned a B2 rating to the company's proposed $360 million senior secured term loan. Proceeds from the facility will be used to pay a $135 million dividend to shareholders as well as to refinance existing indebtedness. Ratings on existing indebtedness will be withdrawn upon close of the transaction. The outlook is stable.

RATINGS RATIONALE

The B2 rating balances MROH's small size and its limited operating history as a consolidated entity against a growing presence as a provider of airframe maintenance, repair and overhaul services (MRO). Moody's expects a favorable operating environment coupled with MROH's growing capacity and steady demand from its core set of anchor customers to support healthy topline and earnings growth over the next 12 to 18 months. This should translate into a gradually improving set of credit metrics. The rating also favorably considers the contracted and relatively predictable nature of time-based requirements for airframe MRO work as well as the company's low cost labor force which improves competitive positioning in a labor intensive industry.

Moody's views the proposed dividend of $135 million as aggressive and as reducing financial flexibility as it represents almost 2 turns of additional leverage and comes just 18 months after ratings were initially assigned. However, we recognize MROH's strong earnings growth during 2018 and the resultant balance sheet improvement that affords the company some leeway for incremental indebtedness. Pro forma for the transaction, we anticipate debt-to-EBITDA (after Moody's standard adjustments) of about 5.3x. Additional tempering considerations include the uneven operating performance at Flightstar as well as expectations of meaningful growth-oriented capacity investments in future years that could weigh on near-term cash generation. That said, we do expect the company to be consistently cash flow positive over the next few years.

The stable outlook reflects expectations that a favorable MRO operating environment along with on-going capacity investments will support topline and earnings growth over the next twelve to eighteen months.

We expect MROH to maintain an adequate liquidity profile over the next 12 months. On-going cash balances are anticipated to be around $20 million and mandatory amortization on term debt is modest at $4 million per annum. Free cash flow generation was modestly negative during 2018 in the face of elevated capex spend, much of which was spent on a new hanger at the Aeroman facility. We anticipate improved cash generation during 2019 with FCF-to-Debt likely to be approaching the mid-single-digits. External liquidity is provided by $36 million in revolving credit facilities from a group of largely foreign lenders. We note that these revolver commitments are set to expire between June and August of 2019. The current rating implicitly assumes that the company will successfully roll over and extend these revolver commitments. At this time, the facilities are undrawn and we anticipate modest usage going forward. The term loan and revolving facilities are not expected to contain any financial covenants.

The ratings could be upgraded if Debt-to-EBITDA was expected to be sustained below 3.5x. Improved operating performance of the Flightstar facility and a track record of strong operational execution at TechOps and Aeroman would be prerequisites to any upgrade. Given the company's small size, we would expect MROH to maintain credit metrics that are stronger than levels typically associated with companies at the same rating level. Any upgrade would be contingent on a strong liquidity profile involving substantial free cash flow generation (FCF-to-Debt in excess of 10%) and near full availability under existing revolver commitments.

The ratings could be downgraded if Debt-to-EBITDA was expected to remain above 5.5x. A weakening liquidity profile with reduced free cash flow and an increased reliance on revolver borrowings could also pressure the rating downward. An inability to extend existing revolver commitments or a reduction in such commitments could also pressure the rating downwards. A leveraging debt-financed acquisition or further shareholder distributions could also result in a downgrade.

The following is a summary of today's rating actions:

Issuer: MRO Holdings, Inc

Corporate Family Rating, affirmed B2

Probability of Default Rating, affirmed B2-PD

$360 million senior secured term loan due 2026, assigned B2 (LGD3)

$225 million senior secured term loan B due 2023, no action -- to be withdrawn at close

Outlook, Stable

MRO Holdings, Inc is a provider of maintenance, repair and overhaul services to airline and freight carrying customers in North America. The company was founded in June 2013 and is owned by an investment vehicle controlled by the Kriete Family (64%) and Caoba Capital (36%). The company owns and operates two MRO facilities based in El Salvador ("Aeroman") and Florida, US ("Flightstar") and also has rights to capacity at TechOps Mexico's operations (a joint venture between Delta Airlines and Aeromexico). Revenues for the twelve months ended December 2018 were $416 million.

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eoin Roche
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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