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Global Credit Research - 09 Feb 2011
New Senior Secured Term Loan due 2017 rated Ba2
New York, February 09, 2011 -- Moody's Investors Service today affirmed TransDigm Inc.'s ("TransDigm")
B1 Corporate Family and Probability of Default ratings, the Ba2
rating on the company's $245 million senior secured revolving credit
as well as the B3 rating on the $1.6 billion senior subordinated
note issues due 2018. Moody's assigned a Ba2 rating to the
new $1.55 billion senior secured term loan due 2017.
The Ba2 rating on the company's existing $1.55 billion
senior secured term loan due 2016 will be withdrawn at the close of the
refinancing. The rating outlook is negative.
Corporate Family Rating, B1;
Probability of Default Rating, B1;
$245 million senior secured revolving credit facility due December
2015, Ba2 with LGD assessment changed to LGD2, 23%
from LGD2, 24%;
$1.6 billion senior subordinated notes due December 2018,
B3 with LGD assessment changed to LGD5, 79% from LGD5,
$1.55 billion senior secured term loan B due February 2017,
Ba2 (LGD2, 24%);
The Ba2 rating on the company's current $1.55 billion term
loan will be withdrawn at the close of the transaction.
The B1 CFR reflects TransDigm's record of revenue growth and operating
profitability driven by its wide collection of niche products and its
high margin aftermarket focus, product position on most aircraft,
and the proprietary and sole sourced nature of most of its product offering.
The B1 rating also considers TransDigm's strong operating performance,
robust margins, and cash generation which will enable the company
to service its increased debt level from the sizeable December 2010 acquisition
of McKechnie Aerospace Holdings, Inc. ("McKechnie")
and reduce leverage near-term to levels again more commensurate
with the B1 rating. It is Moody's opinion that McKechnie's business
profile largely parallel's TransDigm's -- highly proprietary
products, significant margins, and major platform position
in both OEM and aftermarket on most currently produced Boeing and Airbus
aircraft. Moody's anticipates that over the near-term
TransDigm will be able to implement its value driven operating strategy,
including pricing adjustments, to maximize the profitability of
the acquisition and grow TransDigm's revenues and earnings accordingly.
TransDigm's February 2011 announcement of its intended sale of McKechnie's
lower margin, less proprietary fasteners business (gross proceeds
of $240 million) to Alcoa Inc. confirms management's
adherence to the business model that has successfully driven the company
Additionally, TransDigm's ratings benefit from the company's very
good liquidity profile including a $245 million undrawn revolver;
a substantial cash position of over $200 million at 1/1/11,
following the close of the McKechnie transaction; as well as the
expectation for continued strong positive free cash flow generation.
The ratings however are constrained by the increase in leverage and very
high absolute debt level (over 300% of revenue following the McKechnie
acquisition), use of acquisitions as a major driver in its growth
strategy, and the company's history of a shareholder friendly financial
policy of re-leveraging. For the LTM period ended 1/1/11,
TransDigm's leverage is 7.6 times, on a Moody's
adjusted basis, although, while this ratio reflects the increased
debt from the transaction, it is balanced by only 10 days of McKechnie's
earnings due to the timing of the acquisition. Moody's anticipates
that the company's leverage will decrease to closer to 6 times debt to
EBITDA , also on a Moody's adjusted basis, by the end
of FY'11; however, this level would still be outside
the normal leverage levels for a B1 rating. Moody's anticipates
that the company's leverage will likely fall to levels more closely
aligned with B1 rated issuers over the next 12 -- 18 months as the
company receives the earnings benefits from the acquisition, in
addition to our expectation of continued modest organic growth due to
the improved aviation aftermarket environment.
Moody's anticipates that the new $1.55 billion senior
secured term loan B due 2017 rated Ba2 (LGD2, 23%) will be
identical to the existing $1.55 billion senior secured term
loan B due 2016 except for pricing, the maturity, the absence
of financial covenants, and the addition of a one year soft call.
As a result, the instrument rating on the new term loan is the same
as that on the existing term loan rated in December 2010.
The negative rating outlook continues to highlight the increased financial
risk due to the major increase in funded debt, $1.4
billion or nearly 80%, following the McKechnie acquisition,
particularly as it follows by only one year the debt financed $405
million special dividend. The negative outlook also reflects Moody's
expectations that leverage, while likely to decrease from 1/1/11
levels, will remain high for the B1 rating category through FY 2011,
despite the improved aviation aftermarket environment. However,
Moody's anticipates that this deleveraging will more likely occur
from the maintenance or improvement of its markedly robust margins and
earnings growth, rather than substantial debt repayment over the
next 12 -- 18 months. The rating could decline if the company
fails to reduce leverage from current levels, pursues recurring
aggressive equity friendly transactions (dividends, etc.)
or, though unexpected, experience a sustained decline in operating
margins leading to a decline in operating cash flow. The rating
outlook could be stabilized if leverage is reduced and sustained at below
5x debt to EBITDA.
The last rating action for TransDigm was on November 1, 2010 when
the company's B1 CFR and PDR were affirmed, a Ba2 rating was assigned
to the company's new revolver and term loan, a B3 was assigned to
the proposed new senior subordinated note issuance, and the rating
outlook was changed to negative. On December 1, 2010,
Moody's affirmed these ratings upon deal size changes.
The principal methodologies used in rating were Global Aerospace and Defense
published in June 2010, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
TransDigm Inc., headquartered in Cleveland, Ohio,
is a leading 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.
Net sales for the last 12 month period ending 1/1/11 were approximately
$900 million. Pro-forma to include McKechnie,
LTM revenue would approximate $1.1 billion. (These
revenue numbers do not include full year impact of certain acquisitions
made during the LTM period.)
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms TransDigm's B1 CFR; assigns Ba2 rating to refinanced Term Loan
250 Greenwich Street
New York, NY 10007
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