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Related Issuers
Rating Action:

Moody's affirms TransDigm's B1 CFR; assigns Ba2 rating to refinanced Term Loan

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 The Ba2 rating on the company's existing $1.55 billion senior secured term loan due 2016 will be withdrawn at the close of the refinancing.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.

Ratings Affirmed:

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, 80%;

Outlook, Negative

Ratings Assigned:

$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The Ba2 rating on the company's current $1.55 billion term loan will be withdrawn at the close of the transaction.

RATINGS RATIONALE

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 to date.

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.)

REGULATORY DISCLOSURES

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 Analytics information.

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.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms TransDigm's B1 CFR; assigns Ba2 rating to refinanced Term Loan
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