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Global Credit Research - 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
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
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
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%)
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.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's confirms L-1's ratings; corporate family at B3; outlook, developing
250 Greenwich Street
New York, NY 10007
No Related Data.
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