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Related Issuers
Rating Action:

Moody's downgrades Heckler & Koch to Caa2, negative outlook

Global Credit Research - 08 Feb 2012

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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Kathrin Heitmann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Heckler & Koch to Caa2, negative outlook
No Related Data.

 

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