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Rating Action:

Moody's assigns BWX Technologies, Inc. a CFR of Ba2; Ba3 to senior notes

14 May 2018

New York, May 14, 2018 -- Moody's Investors Service, ("Moody's") has assigned a Ba3 rating to BWX Technologies, Inc.'s ("BWXT") proposed senior notes. Proceeds from the notes offering, along with that of a new senior secured term loan (not rated by Moody's), will be used to refinance existing debt and to finance the planned acquisition of Sotera Health's Nordion medical isotopes business ("Nordion") At the same time, Moody's has assigned to BWXT a Ba2 Corporate Family Rating and a Speculative Grade Liquidity Rating of SGL-2.The ratings outlook is stable.

RATINGS RATIONALE

BWXT's Ba2 CFR reflects the company's unique position as the sole source provider of key engineering systems to the US Department of Energy / National Nuclear Security Administration's Naval Nuclear Propulsion Programs, which provides the company with a highly defendable market position in an otherwise fragmented and competitive defense contracting sector. BWXT has a long history as the only manufacturer of nuclear propulsion systems (fuel and reactor components) for the US Navy, on important surface ship (carriers) and submarine platforms. These propulsion systems are manufactured through a highly controlled and classified process as a matter of national security, which protects the company's sole source position for some years to come. As a result of BWXT's competitive position and relationships with the US Department of Energy, including the National Nuclear Security Administration, and key defense contractors, the company generates EBITA margins in excess of 15%, which is strong compared to prime contractors. Along with a stable revenue base, such margins should generate steady free cash flow streams. The company is expected to maintain moderate and manageable debt levels, with pro forma leverage estimated at approximately 2.5 times debt to EBITDA at close of the proposed notes offering, and retained cash flow to debt at nearly 30%.

The ratings also consider the company's modest size and limited scope of product offerings when compared to larger, diversified prime contractors in the defense sector. Ratings also reflect event risk as the company undertakes acquisitions in adjacent technologies to diversify and complement existing operations, as recently exemplified by its Nordion acquisition.

BWXT is expected to maintain a good liquidity profile, as indicated by the Speculative Grade Liquidity Rating of SGL-2, supported by sizeable cash balances and full availability under a $500 million revolver. Free cash flow, however, is only expected to be modest over the next few years.

The proposed $400 million of senior unsecured notes due 2026 are rated Ba3, one notch below the CFR, as this class of debt is subordinated to a substantial amount of senior secured debt comprising $300 million of term loans and $500 million of revolver, both due 2023.

The stable outlook reflects Moody's expectations for revenue growth in excess of 5% annually through 2020 on a steady pace of production and delivery of systems to the US Navy, with EBITA margins maintained at approximately 18-20%. We expect free cash flow in excess of $50 million annually over this period, which will be deployed towards a prudent mix of investments, debt repayment and distributions to shareholders. To the extent that BWXT uses additional debt for acquisitions, we expect such investments to be modestly sized, and that pro forma leverage will remain below 3 times debt to EBITDA.

Ratings could be upgraded if BWXT can successfully execute investment to gain scale, with increasing clarity to the company's strategic focus as it grows. A strategy that focuses on increasing service to principal customers would be deemed less risky than that which seeks to diversify by acquiring businesses outside of its current core competencies. As well, BWXT would need to demonstrate consistent margins of nearly 20% and strong free cash flow generation, with little additional integration risk or business restructuring made necessary from a changing portfolio of operations. Debt to EBITDA sustained in the low 2 times range would be necessary under such a scenario.

Ratings could be downgraded if the company materially increases debt to finance an accelerated pace of acquisitions or to increase its share repurchase program. Weakening liquidity, with expectations for an extended period of negative free cash flows or prolonged drawings on the revolver, would prompt lower rating consideration. EBITA margins below 10% or debt to EBITDA sustained above 3 times could also prompt a downgrade.

Assignments:

..Issuer: BWX Technologies, Inc.

.... Probability of Default Rating, Assigned Ba2-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned Ba2

....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD5)

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.

BWX Technologies, Inc., headquartered in Lynchburg, VA, is a specialty manufacturer of nuclear components, primarily serving the US Navy, but also participating in the commercial nuclear sector in Canada, as well as nuclear technology service to the government and commercial sectors. The company reported $1.7 billion in revenue in the fiscal year ending December 31, 2017.

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.

David Berge
Senior Vice President
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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