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Rating Action:

Moody's assigns B2 CFR to The SI Organization; outlook stable

02 Nov 2010

$340 million of rated bank facilities

New York, November 02, 2010 -- Moody's Investors Service assigned initial B2 Corporate Family and Probability of Default ratings to The SI Organization, Inc. ("The SI") and Ba3 ratings to the company's secured bank obligations. The bank credit facilities are part of the financing for the announced $815 million leveraged acquisition of The SI Organization, Inc. (formerly The Enterprise Integration Group) by affiliates of Veritas Capital from Lockheed Martin Corporation ("Lockheed Martin"). The rating outlook is stable.

The SI provides systems engineering and integration ("SE&I") as well as related modeling, simulation analysis and risk mitigation services to multiple US Government intelligence agencies. By selling its advisory services unit, Lockheed Martin will strategically address organizational conflict of interest ("OCI") requirements created in the Weapon Systems Acquisition Reform Act of 2009. The SI's last-twelve-months revenues through June were roughly $626 million.

Ratings assigned:

Corporate Family, B2

Probability of Default, B2

$40 million secured revolving credit facility, Ba3 (LGD-2, 29%)

$300 million secured term loan, Ba3 (LGD-2, 29%)

RATINGS RATIONALE

The B2 Corporate Family and Probability of Default ratings recognize The SI's established business position as a prime contractor in a niche providing complex SE&I and related services to a compact set of US intelligence agencies. It further incorporates a modest revenue base, consistent operating margins earned predominantly on cost-plus contracts and low capital expenditure requirements. These characteristics are expected to sustain free cash flow generation. However, the rating also emphasizes a highly leveraged capital structure.

The SI's revenues have been relatively flat for the last few years but are seen as having favorable prospects going forward. Revenue drivers include organic growth in federal government expenditures on intelligence and cyber security and being freed from OCI issues resident while part of Lockheed Martin which historically could have constrained it bidding on or being awarded other business. The company's tenure and success in retaining program awards helps mitigate concerns over a limited set of customers and contracts. With its record of contract retention, award fee achievement, below average attrition rates among critical employees and consistent margins, The SI's operational profile should continue. The technical expertise, classified nature of work performed, and low attrition rate of experienced employees offer advantages to incumbent providers. Nonetheless, The SI's balance sheet will involve substantial indebtedness which will elevate its level of fixed charges. With relatively consistent revenues and margins as well as a structure that should minimize near term tax payments, the company should generate steady levels of free cash flow, enabling it to service its debt burden.

The SI's capital structure will consist of $475 million of funded debt and $370 million of common equity. Despite the significant equity contribution, Moody's would gauge The SI's initial adjusted debt/EBITDA to be around 7 times. The rating agency considers the company's EBITA margins as sustainable with EBITA/adjusted interest expense expected to be around 1.5 times.

The stable outlook reflects The SI's established contract and client base which are unlikely to come under near-term pressure, ongoing operating profitability, favorable growth prospects and an adequate liquidity profile.

Factors that could lead to a positive outlook or stronger ratings include demonstrating an ability to expand its top line while sustaining current margins and free cash flow characteristics, lowering its debt/EBITDA below 6 times and lifting its EBITA/interest coverage above 2 times. Developments that could establish negative pressure on the ratings include escalating attrition rates in its experienced professional ranks, losing significant revenues in re-competes, declining margins, incurring negative free cash flow or an elevation of its debt/EBITDA towards 8 times.

The Ba3 rating on the secured debt, two notches above the Corporate Family rating, flows from its priority of claim over $175 million of subordinated debt (not rated) and other junior obligations in the liability waterfall.

The principal methodology used in rating The SI was Global Aerospace and Defense published in June 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Further information will be available in The SI's credit opinion which will be posted on moodys.com.

The SI Organization, Inc., headquartered in Valley Forge, PA, provides advanced systems engineering and technical services to U.S. Government intelligence agencies.

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's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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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
Edwin Wiest
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

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's assigns B2 CFR to The SI Organization; outlook stable
No Related Data.
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