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Announcement:

Moody's confirms L-1's ratings; corporate family at B3; outlook, developing

21 Sep 2010

Approximately $408 million of rated bank facilities

New York, September 21, 2010 -- Moody's Investors Service confirmed the ratings of L-1 Identity Solutions, Inc.'s ("L-1") debt, with the Corporate Family and Probability of Default ratings at B3 and the secured bank facility at B1. Moody's also raised the Speculative Grade Liquidity rating to SGL-3, and changed the outlook to developing. This completes the review for possible downgrade opened on July 7, 2010.

Confirmation of the long-term ratings follows L-1's announcement of agreements for L-1 to be acquired by a unit of Safran SA ("Safran", not rated) for roughly $1.09 billion, subsequent to the sale of L-1's Intelligence Consulting Group to BAE Systems, Inc. ("BAE", the US subsidiary of BAE Systems plc, rated Baa2) for some $296 million. Transactions are subject to L-1 shareholder approval, and various regulatory reviews, including CFIUS.

The announcement extends the period of financial covenant relief under L-1's bank credit facilities with lower covenant thresholds in position through March 30, 2011. After that, more restrictive covenant levels would become effective. This extended period of covenant relief combined with the cash expected from sale of the Intelligence Consulting Group improves the liquidity somewhat, as reflected by the revised rating of SGL-3.

From a rating perspective, the transactions involve two stages.

Moody's interpretation of the bank credit agreement would call for proceeds from the BAE transaction to be used to repay the bank term loan (anticipated to be $269 million outstanding at the end of September per existing amortization schedules) with the remainder used to reduce any outstanding borrowings under the revolving credit. At that point, Moody's expects L-1's term loan to be fully repaid and would withdraw its rating. The rated revolving credit is expected to remain in place until the second stage, the acquisition of L-1 by Safran. At the completion of stage 1, i.e., following sale of the Intelligence Consulting Group, L-1 would have very limited debt at the operating company level. The bulk of continuing indebtedness would be the holding company's $175 million convertible note. L-1 would be a smaller entity at that point. L-1 reported the units BAE plans to acquire represent approximately 1/3rd of anticipated 2010 revenues and 28% of L-1's measure of adjusted EBITDA. The acquisition by Safran is expected to result in the termination of the revolving credit agreement through change in control provisions. At that point, Moody's expects the remaining L-1 ratings to be withdrawn.

Collectively, these transactions indicate improved liquidity in the near term. The transactions proposed, which followed L-1's prior announcements of reviewing strategic alternatives, reduces but does not eliminate the potential for weaker ratings from execution risk, yet also establishes potential for stronger ratings following debt reduction from the proceeds of the Intelligence Consulting Group sale.

The B3 CFR considers the company's moderate size in comparison to other government contractors, certain advantages as an incumbent provider with competitive positions within its niches across a collection of identity and credential services, and favorable growth prospects over time. The ratings further incorporate the company's elevated leverage and limited operating profitability which has led to weak interest coverage metrics. Long-term revenue potential will be tied to outlays for government-sponsored or mandated programs. While significant revenue is derived from customers within the US Government, it is spread across multiple contracts, programs and departments. Yet, divisions of substantially larger companies and certain systems integrators are active within the company's sectors and could commit significant resources at some point to challenge L-1 in a technology sensitive industry. The ratings also consider L-1's material backlog of orders which along with certain government identity mandates and funding programs provide a degree of revenue visibility.

The company's capital structure includes $175 million of convertible securities at the holding company level whose holders have an option to put the securities to the company in May 2012 with settlement in cash. Capital expenditure requirements in its state licensing business have constrained free cash flow generation in 2010 which has limited the company's ability to materially reduce its debt burden from earlier acquisitions and led to utilization of its revolving credit commitment. L-1 could begin to generate stronger free cash flow in 2011 if it achieves higher EBITDA levels and its capital expenditure requirements begin to ebb. However, scheduled principal amortization steps-up in the fourth quarter of 2010, so L-1 may need continued access to the undrawn portion of the revolving credit to meet scheduled maturities.

The announcement of the transactions therefore improves access to the revolving credit facility because greater cushion will exist under financial covenants for a period through March 30, 2011. This allows L-1 to complete its capital expenditures while enhancing its liquidity should it need external support to meet term loan amortization payments and awaiting consummation of the BAE and Safran transactions. Accordingly, the speculative grade liquidity rating was raised to SGL-3 from SGL-4. Moody's notes that assessing financial covenant compliance at March 31, 2011 should the Safran transaction not close by that date could pose some challenges. Earnings from units which BAE plans to acquire could be absent for a period of time, trailing amortization payments included in the denominator in the debt service coverage would be higher and the covenant level would step-up to 2.25 times from 1.65 times. (The reported measurement in L-1's 10-Q filing for June 30, 2011 was 2.12 times).

The developing outlook considers the potential positive impact to ratings should the BAE asset sale occur and de-lever the capital structure, albeit on a smaller enterprise. Alternatively, should the transactions not close; tighter covenants could pose challenges to L-1's liquidity as early as the second quarter of 2011 when March 31 compliance calculations would fall due. This latter scenario could pressure the ratings down.

Ratings confirmed with updated Loss Given Default point estimates:

Corporate Family Rating, B3

Probability of Default, B3

Secured bank debt B1 (LGD-3, 33%)

Ratings changed:

Speculative Grade Liquidity to SGL-3 from SGL-4

The last rating action was on July 7, 2010 at which time the corporate family and probability of default ratings were lowered to B3 from B2 and the ratings were placed under review for possible further downgrade.

The principal methodology used in rating L-1 was the Global Aerospace/Defense Industry methodology, published in June 2010 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in Rating Methodologies sub-directory on Moody's website. For additional information on L-1, please see moodys.com.

L-1 Identity Solutions, Inc., headquartered in Stamford, CT, is a leading provider of multi-modal services which address identity risk, secure credentialing, biometric identity, fingerprinting and related engineering and analytical solutions. Revenues in 2009 were $651 million.

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
Robert Jankowitz
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
USA

Moody's confirms L-1's ratings; corporate family at B3; outlook, developing
No Related Data.
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