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I AGREE
22 Mar 2011
Approximately $510 million rated debt affected
New York, March 22, 2011 -- Moody's Investors Service has changed the ratings outlook of Kratos
Defense & Security Solutions, Inc. to positive from stable
and affirmed the company's B3 corporate family and probability of
default ratings. Concurrently, a B3 rating has been assigned
the planned $285 million of senior secured add-on notes
due 2017. The speculative grade liquidity rating of SGL-3
remains unchanged. Proceeds from the planned note issuance are
intended to fund Kratos' tender offer for the shares of Herley Industries
Inc., with excess proceeds to boost cash on hand by about
$70 million.
Ratings assigned:
$285 million 10% senior secured notes due 2017, B3,
LGD4, 53%
Ratings affirmed:
Corporate family, B3
Probability of default, B3
$225 million 10% senior secured notes due 2017, B3,
LGD4, to 53% from 54%
Speculative grade liquidity, SGL-3
RATINGS RATIONALE
The positive outlook reflects Kratos' enlarged scale and increased
product range that would follow the Herley acquisition, and potential
that the company's credit metrics could support a higher rating
level over the ratings horizon. Following the Herley transaction
Kratos' revenue base will exceed $700 million, up from
$335 million in 2009. (Herley's FY2010 revenues were $188
million, almost half of Kratos's 2010 revenues.) The company's
product offerings center on sub-system hardware and equipment that
extend weapon system lifecycle; the portfolio should benefit from
the U.S. Department of Defense's growing preference
for upgrades of existing platforms, versus costlier new platform
development. We think the company may be able to generate free
cash flow to debt in the high single digit percentage range which could
help reduce leverage. To supplement acquisition borrowing,
Kratos raised $61 million through equity issuance in 2011 and we
believe the company could issue more equity to fund future acquisitions.
Willingness and ability to raise equity also increases the likelihood
that leverage can be maintained at lower levels while the company pursues
its growth goals.
The B3 CFR has been affirmed because leverage is high and the pace of
Kratos' acquisition spending carries significant risks, including
risks that integration and challenges of managing the enterprise could
become difficult, limiting potential for steady profits and improved
credit metrics. In 2010, Kratos spent $217 million
on acquisitions. Herley would cost $270 million.
Although the company may generate a 2011 free cash flow to debt ratio
in the high single digit percentage range, debt to EBITDA may stay
elevated because the company could continue acquiring companies.
As of Q4-2010 debt to EBITDA was 6x on a Moody's adjusted
basis with EBIT to interest of 1.3x. The B3 acknowledges
$187 million of impairment and one-time charges incurred
over 2006-2009, which could suggest heightened risk of overpayment
for growth.
The speculative grade liquidity of SGL-3 remains unchanged,
denoting adequate liquidity. Following the $285 million
add-on note offer and the Herley transaction, the company
would have almost $80 million of cash on hand. The cash
helps the liquidity profile because the company's $35 million
revolver would only have about $25 million available for borrowing
following the Herley transaction (after $10 million of letters
of credit utilization), a low amount considering the revenue base.
The rating would likely be upgraded if we expect that the company can
maintain debt to EBITDA at or below to 5x with EBIT to interest above
1.5x. Stabilization of the outlook would likely follow expectation
of leverage remaining at 6x with slim interest coverage.
The principal methodologies used in this 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.
Kratos Defense & Solutions, Inc., headquartered
in San Diego, CA, operates in two sectors; Kratos Government
Solutions (91% of 2010 revenues) and Public Safety and Security
(9%). Revenues in 2010 were approximately $409 million.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings and public 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
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Please see the ratings disclosure page on our website www.moodys.com
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New York
Bruce Herskovics
Asst Vice President - 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.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Kratos' outlook to positive, rates add-on notes B3
No Related Data.
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