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Rating Action:

Moody's affirms TransDigm's B1 CFR; Ba2 senior secured debt under review for downgrade

10 Jan 2019

NOTE: On January 29, 2019, the press release was corrected as follows: In the debt list, under TransDigm Inc., the description of the Senior Secured Bank Credit Facility was changed to reflect a change in the LGD to LGD 3 from LGD 2. Revised release follows.

New York, January 10, 2019 -- Moody's Investors Service ("Moody's") affirmed certain ratings for TransDigm Inc. including the B1 Corporate Family Rating (CFR), the B1-PD Probability of Default Rating and the B3 senior subordinated rating. Concurrently, Moody's placed the senior secured Ba2 ratings under review for downgrade and anticipates that if the pending acquisition of Esterline Technologies Corp. ("Esterline") is substantially financed through incremental senior secured debt, the senior secured ratings would be downgraded to Ba3. The outlook for TransDigm Inc. is changed to rating under review which applies only to senior secured debt and Moody's expects to only downgrade the Ba2 senior secured ratings and not any other ratings. Once the review is completed, Moody's would expect to affirm all ratings, downgrade the senior secured debt and have a negative outlook. Ratings of Esterline ("TA Mfg Limited UK") are unchanged, as the debt is expected to be repaid upon closing.

RATINGS RATIONALE

The B1 Corporate Family Rating considers TransDigm's high tolerance for financial risk, aggressive financial policy and the company's private equity-like business model that prioritizes shareholder returns over creditors. The rating also reflects TransDigm's weak balance sheet and the cyclical nature of its commercial OEM aerospace markets (30% of sales) which are vulnerable to economic downturns.

Partially mitigating concerns around high financial leverage is TransDigm's strong competitive standing supported by the proprietary and sole-sourced nature of the majority of its products, its industry leading profitability metrics, as well a strong liquidity profile and favorable demand fundamentals within aerospace and defense end-markets. The company's installed base of niche products across multiple carriers and platforms as well as its focus on highly profitable aftermarkets, which add stability to its revenue stream adds further support to the rating.

TransDigm's industry leading margins are a critical rating consideration as they enable the company to operate with higher levels of financial leverage and are an important driver of its strong cash generating capabilities. Given Esterline's lower margins (EBITDA margins currently in the mid-teens relative to TransDigm's EBITDA margins which approach 50%), Moody's anticipates that the acquisition will have a meaningful dilutive impact on TransDigm's profitability with pro forma consolidated margins likely to decline to below 40%. TransDigm's ability to strongly execute and to apply its value-based operating strategy to help mitigate the dilutive impact of Esterline on the company's margins such that it is able to restore future margins back into the 40% range will be an important rating consideration over the next few years.

Pro forma for the Esterline acquisition, debt-to-EBITDA (after standard adjustments) is expected to increase about 0.75x to the high 7x range, a level that is at the upper bounds of leverage previously published for expectations for the ratings. Given the very high level of pro forma leverage, Moody's expects the company to refrain from any near-term shareholder distributions or additional leveraging M&A transactions. An inability or an unwillingness to reduce financial leverage back towards 7x would likely result in downward rating pressure.

The negative outlook for TransDigm Holdings UK plc reflects TransDigm's highly leveraged balance sheet that will constrain financial flexibility over the next 12 months as well as elevated near-term execution risk relating to the large-sized acquisition of Esterline.

The SGL-1 speculative grade liquidity rating denotes expectations of a very good liquidity profile over the next 12 months. Moody's expects TransDigm to maintain healthy cash balances (cash on hand after the Esterline acquisition is likely to be around $1.7 billion), substantial free cash generation (FCF-to-Debt during 2019 is anticipated to be at least in the mid-single-digits) and near full availability under its $600 million revolving credit facility. This should afford the company the financial flexibility necessary to manage its large debt burden.

TransDigm's senior secured term debt is rated two notches above the CFR at Ba2 reflecting meaningful secured collateral support and the cushion against loss provided by the senior subordinated notes, which are rated B3, two notches below the CFR. While the financing specifics of the Esterline acquisition are still to be finalized, Moody's anticipates that substantially all of the transaction will be funded though incremental senior secured term debt. With a meaningful increase in secured debt relative to unsecured debt, this is expected to result in ratings on existing senior secured indebtedness being downgraded by one notch to Ba3.

An upgrade is unlikely in the near term given TransDigm's highly leveraged capital structure. Any upward rating action would be driven by leverage sustained below 5.0x on a Moody's adjusted basis, coupled with the maintenance of the company's industry leading margins and a continuation of the strong liquidity profile.

Factors that could result in lower ratings include expectations that Moody's adjusted Debt-to-EBITDA will remain sustained at the high 7x level. An inability or an unwillingness to reduce financial leverage back towards 7x would likely cause downward rating pressure. A deteriorating liquidity profile involving FCF-to-Debt continuously below 5%, annual free cash flow generation sustained below $700 million or increased reliance on revolver borrowings could also pressure the rating downward. An inability to improve profitability such that EBITDA margins were expected to remain around 40% could also result in downward rating pressure over time.

The following rating actions were taken:

..Issuer: TransDigm Inc.

....Probability of Default Rating, Affirmed B1-PD

....Speculative Grade Liquidity Rating, Affirmed SGL-1

....Corporate Family Rating, Affirmed B1

....Senior Subordinated Regular Bond/Debenture, Affirmed B3 (LGD5)

....Senior Secured Bank Credit Facility, Placed on Review for Downgrade, currently Ba2 to (LGD3) from (LGD2)

....Outlook, Changed To Rating Under Review From Negative

..Issuer: TransDigm Holdings UK plc

....Senior Subordinated Regular Bond/Debenture, Affirmed B3 (LGD5)

....Outlook, Negative

TransDigm Inc., headquartered in Cleveland, Ohio, is a manufacturer of engineered aerospace components for commercial airlines, aircraft maintenance facilities, original equipment manufacturers and various agencies of the US Government. TransDigm Inc. is the wholly-owned subsidiary of TransDigm Group Incorporated (TDG). Esterline Technologies Corp. designs and manufactures highly engineered products and systems primarily serving aerospace and defense customers. Pro forma revenues for the combined companies for the last twelve month period ending September 30, 2018 are approximately $5.8 billion.

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

Robert Jankowitz
MD - Corporate Finance
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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