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Rating Action:

Moody's changes ASP's outlook to negative; affirms ratings

24 Sep 2020

New York, September 24, 2020 -- Moody's Investors Service ("Moody's") changed ASP Navigate Acquisition Corp.'s ("ASP") outlook to negative from stable. At the same time, Moody's affirmed the company's B2 Corporate Family Rating, B2-PD Probability of Default Rating and B2 first lien credit facility ratings.

The change of outlook follows the company's decision to upsize its senior secured first lien term loan by $25 million to $425 million. The upsize will increase the company debt/EBITDA by approximately 0.4x leaving minimal cushion for any misstep in the execution of its separation from NN, Inc. The outlook change also reflects a more aggressive financial policy by its private equity owners as the initial level of equity is declining.

ASP will acquire the Life Sciences division of NN, Inc. (Caa2 on Review for Upgrade) for cash consideration of approximately $755 million. Cash sources include proceeds from the first lien credit facilities and approximately $365 million of equity provided by American Securities LLC. In addition, ASP may also make an additional payment to NN, Inc. of up to $70 million in 2023 on achievement of certain EBITDA targets.

The following ratings were affirmed:

ASP Navigate Acquisition Corp.

... Corporate Family Rating at B2

... Probability of Default Rating at B2-PD

... Proposed $60 million senior secured first lien revolving credit facility at B2 (LGD4)

... Proposed $425 million (includes $25 million upsize) senior secured first lien term loan at B2 (LGD4)

Outlook Action:

ASP Navigate Acquisition Corp.

...Outlook changed to negative from stable

RATINGS RATIONALE

ASP's B2 Corporate Family Rating reflects the company's moderately high financial leverage with debt/EBITDA in the mid-five times range as of June 30, 2020. Moody's expects debt/EBITDA will rise to the high six times range by the end of 2020 but will improve over the course of 2021 as sales volumes recover. The rating also reflects the company's high customer concentration, with its 6 largest customers accounting for approximately 80% of revenues and high product concentration, with 70% of revenues from orthopedic related products. ASP's ratings reflect the business risks associated with contract manufacturing, including potential fluctuations in medical device customer demand and inventory levels, less favorable payment terms offered by large medical device customers and industrywide pricing pressure. The rating also reflects the company's lack of history as a stand-alone company and execution risk associated with the separation from NN, Inc. and Moody's expectations that financial policies will remain aggressive due to ownership by a private equity sponsor.

ASP's B2 CFR benefits from the company's reasonable scale in the highly fragmented medical device contract manufacturing industry, strong market position and relatively good profit margins. While the company has high customer concentration, the company sells a wide range of products to its key customers. Further, regulatory constraints make switching costs high for its customers, resulting in long-term sticky relationships between ASP and its customers. ASP also benefits from good liquidity as Moody's expects the company will generate sustained free cash flow and will have access to an undrawn $60 million revolving credit facility.

Medical device companies face moderate social risk primarily related to responsible production and satisfactorily responding to social and demographic trends. For ASP, the social risks are primarily associated with responsible production including compliance with regulatory requirements for the safety of medical devices as well as adverse reputational risks arising from recalls associated with manufacturing defects.

The outlook is Negative. Moody's expects ASP will see a recovery in sales volumes over the course of 2021 such that revenues will approximate 2019 levels as medical procedure volumes recover. Moody's expects debt/EBITDA will approach the mid-five times range over the course of 2021. The Negative outlook also incorporates the expectation that the company will be able to smoothly transition to a stand-alone company as it completes the separation from NN, Inc.

The proposed first lien term loan is expected to have no financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien leverage ratio that will be tested when the revolver is more than 35% drawn. In addition, the first lien credit facility contains incremental facility capacity up to the greater of $79 million or 100% of consolidated EBITDA. There are no "blocker" provisions providing additional restrictions on top of the covenant carve-outs to limit collateral leakage through transfers of assets to unrestricted subsidiaries. There are leverage-based step-downs in the asset sale prepayment requirement to 50% and 0% if the First Lien Leverage Ratio is equal to or less than 0.5x and 1.00x, inside the closing date First Lien Leverage Ratio, respectively.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded if the company successfully executes the separation from NN, Inc. and demonstrates margin expansion as a standalone company. Further growth in scale and diversification would be positive credit factors. Quantitatively, ratings could be upgraded if financial policies are balanced and the company sustains debt/EBITDA below 4.5 times.

Ratings could be downgraded if the company's liquidity profile erodes or if there are execution issues arising from the separation from NN, Inc. Quantitatively, ratings could be downgraded if Moody's expects debt/EBITDA be sustained above 6 times.

The principal methodology used in these ratings was Medical Product and Device Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1071635. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ASP Navigate Acquisition Corp. is an entity created to acquire the Life Science division of NN, Inc. The business acquired is a manufacturer of orthopedic and medical surgeon parts whose customers are some of the world's largest medical device product companies. LTM revenues were approximately $339 million. The acquisition is scheduled to close in the fourth quarter of 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Kailash Chhaya, CFA
Vice President - Senior Analyst
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

Jessica Gladstone, CFA
Associate Managing Director
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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