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Global Credit Research - 07 Jul 2010
$413 million of rated bank obligations
New York, July 07, 2010 -- Moody's Investors Service downgraded L-1 Identity Solutions,
Inc.'s ("L-1") Corporate Family and Probability
of Default ratings ("CFR" and "PDR" respectively) to B3 from B2.
Ratings on L-1's senior secured bank debt were lowered to
B1 from Ba3. At the same time, L-1's Speculative
Grade Liquidity rating was lowered to SGL-4, representing
weak liquidity, from SGL-2. The CFR, PDR and
bank debt ratings remain under review for possible further downgrade.
L-1's performance was below expectations in the most recent quarter,
which in turn created a need for an amendment to L-1's credit
facilities to avoid a technical violation of its financial covenants.
As the company is in the process of reviewing strategic alternatives,
the amendment provided a limited period of covenant relief which could
expire as early as the end of September 2010 should the company not announce
an agreement by the end of August to effectively sell all, or substantially
all, of itself to an interested party(ies). While the company
remains confident that its revenues and earnings for the balance of 2010
will markedly improve, in the absence of an agreement for a sale
of the company, L-1 will need to achieve higher EBITDA levels
to satisfy financial covenant levels applicable at the September measurement
date and afterward. Consequently, developments in L-1's
exploration of strategic alternatives will have a meaningful impact on
L-1's capital expenditures will remain elevated over the
balance of the year before an expected decline in 2011. This is
occurring at the same time amortization of its term loan will step-up
(current maturities of long-term debt stood at $29 million
at the end of March but will increase further in late 2010) and when presumed
revenue expansion could require incremental working capital. Collectively,
these establish adverse pressure on the firm's liquidity and probability
of default, as, even if the company generates material free
cash flow, it may still require access to the revolving credit to
service scheduled principal repayments. This elevation of risk
is manifested in the lower liquidity, corporate family and probability
of default ratings.
The B3 CFR and PDR consider 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, as well as favorable growth
prospects over time. 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 ratings also incorporate the company's elevated leverage, challenging
liquidity in comparison to approaching debt payments, and limited
operating profitability which has led to weak interest coverage metrics.
The company's capital structure includes $175 million of convertible
securities 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
which has limited the company's ability to materially reduce its debt
burden from earlier acquisitions. 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, but its scheduled
principal amortization steps-up at the end of 2010.
The ratings remain under review for possible further downgrade.
The review will focus on the outcome of any prospective sale of the company
or other strategic options being considered. A sale of the firm
could involve a financially stronger buyer, lead to a refinancing
or full repayment of existing debt as well as extend the time frame of
financial covenant relief granted by the bank group. In such a
scenario, L-1's core ratings could stabilize or improve
either as a result of a pending purchase or upon reaching its earnings
and cash flow guidance and entering into 2011 with expectations of stronger
EBITDA and free cash flow. Should a sale not be agreed, and,
absent any further amendments to the bank credit agreement or refinancing,
the ratings could face additional pressure from limited headroom under
financial covenants, particularly if performance is less than guidance,
and if a more precarious liquidity situation develops.
The SGL-4 liquidity rating incorporates modest cash balances,
expectations of limited positive free cash generation over the near term,
significant debt amortization in the next 12 months in comparison to those
internal resources, and access to a $135 million revolving
credit facility but under which availability is constrained from the impact
of financial covenant tightening.
Ratings downgraded and updated Loss Given Default point estimates:
Corporate Family to B3 from B2
Probability of Default to B3 from B2
$135 million 1st lien revolving credit to B1 (LGD-3,
33%) from Ba3 (LGD-2, 29%)
$278 million 1st lien term loan to B1 (LGD-3, 33%)
from Ba3 (LGD-2, 29%)
Speculative Grade Liquidity to SGL-4 from SGL-2
The last rating action was on December 22, 2009 at which time the
B2 Corporate Family and Probability of Default ratings were affirmed.
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.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's downgrades L-1 Identity to B3; ratings under review for possible further downgrade as L-1 explores strategic alternatives
No Related Data.
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