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Rating Action:

Moody's assigns provisional ratings to Alion's proposed refinancing; liquidity rating now SGL-4 and other existing ratings placed under review, direction uncertain

17 Jul 2015

Approximately $860 million of existing rated and proposed debt and/or bank credit facilities affected

New York, July 17, 2015 -- Moody's Investors Service assigned provisional (P)B1 ratings to the proposed $320 million of new senior secured (first lien) bank term loan and revolving credit facilities and a (P)Caa1 rating to its proposed $120 million senior secured (second lien) term loan that are being arranged for Alion Science & Technology Corporation ("Alion"). Concurrently, Moody's placed all existing ratings for Alion and its current debt, including the company's Caa1 corporate family rating ("CFR") and B1 senior secured (first lien) and Caa1 senior secured (second lien) ratings under review, direction uncertain, with the ultimate outcome dependent on whether or not the planned initial public offering ("IPO") and debt refinancing is successfully completed. The assigned provisional ratings are subject to the receipt and review of final documentation and closing of the proposed refinancing transaction. Of note, the refinancing is contingent on the successful execution of the company's IPO. The company's speculative grade liquidity rating ("SGL") was lowered to SGL-4 from SGL-3, indicating a deemed "weak" liquidity profile absent successful completion of the proposed transaction.

Proceeds from the proposed bank debt placements together with $310 million of proceeds from the company's proposed IPO are expected to be used to repay existing debt as well as fund sizable transaction related expenses. The transaction would reduce funded debt by approximately $200 million and meaningfully reduce both cash interest expense and required amortization payments compared to currently stipulated provisions under the company's existing debt structure.

Ratings assigned:

-- $40 million senior secured first lien revolving credit facility due 2020, (P)B1 (LGD-2)

-- $280 million senior secured first lien term loan due 2021, (P)B1 (LGD-2)

-- $120 million senior secured second lien term loan due 2022, (P)Caa1 (LGD-5)

Ratings placed under review, direction uncertain:

-- Corporate Family Rating, Caa1;

-- Probability of Default Rating, Caa2-PD;

-- $65 million senior secured revolving credit facility due 2018, B1 (LGD-1)

-- $110 million first lien term loan A due 2018, B1 (LGD-2)

-- $175 million first lien term loan B due 2019, B1 (LGD-2)

-- $70 million second lien term loan due 2020, Caa1 (LGD-3)

Ratings downgraded:

-- Speculative Grade Liquidity Rating, to SGL-4 from SGL-3

Outlook: Ratings Under Review, Direction Uncertain

RATINGS RATIONALE

Alion's ratings were placed under review, direction uncertain, given the inherent uncertainty related to the company's forthcoming planned IPO and debt refinancing. If successfully completed, the company's CFR could be raised one notch to B3 from Caa1 given the beneficial pro forma impact this would have on liquidity, with a significant ensuing reduction of interest expense and requisite principal amortization payments compared to the existing debt structure. However, if the IPO and debt refinancing are not effectuated as proposed, and the company's existing debt structure remains in place, ratings will likely be lowered due to the company's deemed "weak" liquidity profile and the ensuing elevated risk of default given its currently very high debt service costs and our expectation that the company will otherwise be unable to satisfy the same.

The provisional ratings are based on the expectation that the proposed IPO and refinancing are successfully executed, and that such a scenario would be reflective of a B3 CFR if the transactions close as proposed. The proposed transactions reduce financial leverage (as measured by Moody's adjusted debt/EBITDA) by more than 2 turns, to 5.7x, and lower cash interest expense by approximately $15 million such that EBIT/interest coverage improves to more than 1.5 times, from less than 1.0 time. The company's liquidity profile would improve post the transaction, primarily as a result of the aforementioned reduction in annual cash interest expense and lower requisite annual amortization payments under the current debt structure.

If the proposed transaction is successfully executed, the SGL rating will likely be raised to SGL-3, denoting an adequate liquidity profile. However, based on the company's existing debt structure, the company's liquidity rating was lowered to SGL-4, from SGL-3. The SGL-4 liquidity rating reflects a "weak" forward profile due to sizable cash outflows associated with high interest expense and amortization payments under its current debt capitalization, particularly relative to its free cash flow generation, and what we assess to be little availability under its current revolver predicated in part by limited headroom under its existing fixed charge financial maintenance covenant.

The principal methodology used in these ratings was Global Aerospace and Defense Industry published in April 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Alion Science and Technology Corporation ("Alion") provides scientific research, development, and engineering services related to national defense, homeland security, and energy and environmental analysis. Particular areas of expertise include agile engineering and rapid prototyping, naval architecture and engineering, defense operations, modeling and simulation, technology integration, information technology and wireless communications, energy and environmental services. Revenue for the last twelve months ended March 31, 2015 approximated $896 million.

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For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

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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.

Jadijhe (Gigi) Adamo
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns provisional ratings to Alion's proposed refinancing; liquidity rating now SGL-4 and other existing ratings placed under review, direction uncertain
No Related Data.
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