Approximately EUR295 million of rated debt affected
Frankfurt am Main, February 08, 2012 -- Moody's Investors Service has today downgraded Heckler & Koch GmbH's
(Heckler & Koch) Corporate Family Rating (CFR), Probability
of Default Rating (PDR) and the rating on the EUR295 million senior secured
notes due 2018 to Caa2 from Caa1. The outlook on all ratings remains
negative.
Downgrades:
..Issuer: Heckler & Koch GmbH
.... Probability of Default Rating,
Downgraded to Caa2 from Caa1
.... Corporate Family Rating, Downgraded
to Caa2 from Caa1
....Senior Secured Regular Bond/Debenture,
Downgraded to Caa2 from Caa1
RATINGS RATIONALE
Today's rating action reflects Moody's increased concern that
Heckler & Koch's cash flow generation and available liquidity
sources will not be sufficient to support its operating needs as well
as debt service requirements on its EUR295 million senior secured notes
due 2018 in the intermediate term. In the absence of long-term
committed credit lines, the group's liquidity sources are
limited to cash on balance sheet of around EUR22 million per December
31, 2011 (including restricted cash of around EUR5 million) and
cash flow generation from operations.
Heckler & Koch's cash on balance sheet at year-end 2011
should support the EUR14 million bond interest payment on 15 May 2012.
However, future interest payments, due each 15 May and 15
November, could be at risk in case of a delay in collecting invoice
payments or in case of an unexpected delay in receiving export licenses.
In addition, Heckler & Koch so far has not succeeded in improving
its liquidity situation, given the continued lack of a long-term
committed revolving credit facility. Apart from the required interest
payments on the EUR295 million bond, the group has no near term
debt maturities.
Moody's considers Heckler & Koch's capital structure with
a persisting high leverage to be unsustainable without a capital injection
or long-term committed credit line and there is limited time to
accomplish this in light of the EUR28 million annual interest burden.
A debt restructuring thus appears increasingly likely. For the
last twelve months period ending 30 September 2011 the group had adjusted
debt/EBITDA of 6.8x and FCF/debt of -0.8%.
In addition, we are increasingly concerned that the group's
tight liquidity situation might start to impair its competitive position,
if Heckler & Koch failed to obtain performance guarantees from banks.
The negative outlook is primarily based on the company's tight liquidity
profile and the anticipation that free cash flow generation will remain
very modest in the short to medium term and therefore insufficient to
materially improve cash on balance sheet.
Despite the current all-bond capital structure Moody's has aligned
the CFR to the PDR given HK's weak liquidity which could accelerate a
default. The Caa2 rating of the EUR295 million senior secured notes
is in line with both CFR and PDR given that the notes are issued by an
operating entity which conducts substantially all of the production and
a significant proportion of sales. Moreover, the notes benefit
from upstream guarantees of all direct and indirect subsidiaries and are
secured by share pledges which Moody's views as less valuable than tangible
assets.
Other factors reflected in the group's Caa2 CFR are i) Heckler &
Koch's strong position in the global market for small arms behind
Freedom Group (rated B1/stable outlook) and Smith & Wesson (unrated)
as well as ii) its solid operating performance with however, limited
room for further improvement given headwinds from government austerity
measures, raw material costs and HK's challenge to obtain export
licenses to non-NATO countries, particularly in the light
of the currently ongoing investigations focusing on a potential violation
of export licenses. Furthermore, the rating incorporates
iii) HK's customer concentration with 64% of sales generated by
the four biggest customers in 2010, iv) the concentration of 98%
of the production in one single plant in Oberndorf, v) ongoing legal
risks related to the company's business model and vi) the limited flexibility
of HK to adjust its workforce and production to a changing demand pattern.
TRIGGERS FOR A POTENTIAL DOWNGRADE/UPGRADE
Further downward pressure could arise in case of heightened risk of a
near-term default through depletion of cash resources, putting
scheduled semi-annual interest payments on the EUR295 million senior
secured notes due 2018 at risk.
The rating could be upgraded in case of a sustained improvement in the
group's weak liquidity profile with readily available cash on balance
and available long-term credit lines (currently not available)
sufficient to cover interest payments of EUR28 million per year as well
as seasonal swings in working capital and capex investments.
The principal methodology used in rating Heckler & Koch GmbH was the
Global Aerospace and Defense Industry Methodology published in June 2010.
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.
Headquartered in Oberndorf, Germany, Heckler & Koch is
a leading, privately owned, defense contractor in the small
arms sector. The company generated sales of EUR232 million in the
last twelve months ending September 2011. Heckler & Koch supplies
the armed forces of NATO and NATO allies, European and US Special
Forces, European police forces and US federal law enforcement agencies
and other countries. HK designs, produces and distributes
small arms, including rifles, side arms, fully automatic
weapons and grenade launchers, as well as a variety of related products.
It also provides parts and services to the military sector.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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
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Kathrin Heitmann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
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Matthias Hellstern
Associate Managing Director
Corporate Finance Group
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Releasing Office:
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Moody's downgrades Heckler & Koch to Caa2, negative outlook
