London, 01 December 2017 -- Moody's Investors Service, ("Moody's") has
today downgraded the corporate family rating (CFR) of Photonis Technologies
SAS (Photonis) to Caa1 from B3 and the probability of default rating (PDR)
to Caa1-PD from B3-PD. Concurrently, Moody's
has downgraded the instrument rating on the senior secured term loans
to Caa1 from B3 and the instrument rating on the super senior revolving
credit facility (RCF) to B1 from Ba3. The outlook on all ratings
remains negative.
RATINGS RATIONALE
"The rating action reflects (1) the weaker-than-expected
trading performance of Photonis over the first nine months of fiscal year
(FY) 2017 leading to a further deterioration of the company's leverage
to around 9x as of the end of the period (based on unaudited management
accounts) from around 8x as of the end of FY ending 31 December 2016 (based
on unaudited accounts or 8.9x as calculated by Moody's including
the negative impact of non-recurring items and write-off
of inventories, among others, as disclosed in the 2016 audited
annual accounts) and (2) the lack of clear de-leveraging trend
over the coming quarters while the maturity of the senior secured term
loans is looming raising the risk of default driven by a potential debt
write-off or distressed exchange", says Sebastien Cieniewski,
Moody's lead analyst for Photonis.
These weaknesses are partly mitigated by the company's adequate
liquidity position supported by the EUR16 million cash balance as of the
end of September 2017 which Moody's expects to increase towards
EUR25 million by the end of FY 2017 as Q4 is typically generating a significant
portion of group annual EBITDA and cash flow. Moody's expects
that the internal sources of funding should cover the company's
needs over the next 12 months mitigating the lack of external sources
of liquidity when the RCF expires in September 2018.
Photonis has experienced a prolonged period of weakening revenues over
the last three years. Most recently, the company's
sales declined by 6% in FY 2016 and a further 13% in the
first nine months of FY 2017 compared to the same periods in prior year.
This decline was mainly driven by lower demand for the company's
core night vision products and unfavorable product mix towards lower value
components.
The decline in sales had a disproportionately negative impact on group
profitability. EBITDA (as reported by the company) decreased by
21% to EUR38 million in FY 2016 and by 51% in the first
nine months of FY 2017 compared to the same period in prior year.
The drop in EBITDA in Q1-Q3 2017, which was driven by the
pressure on sales, was only partly mitigated by a cost cutting plan
put in place by the company which generated savings of EUR2 million in
manufacturing overheads and EUR1 million in general and administrative
expenses during the period.
The drop in EBITDA resulted in a further deterioration of Photonis'
adjusted gross leverage towards 9x as of the last twelve months (LTM)
to 30 September 2017 (based on unaudited management accounts and an LTM
EBITDA of EUR30 million as reported by the company) from below 8x as of
the end of FY 2016 (or 8.9x as calculated by Moody's including
the negative impact of non-recurring items and write-off
of inventories, among others, as disclosed in the 2016 audited
annual accounts). While Moody's positively notes the sale
of a technology transfer contract with India should bring a boost to the
company's sales and EBITDA of c.EUR10 million and EUR8 million,
respectively, a portion of which will be invoiced in FY 2017 with
the remainder to be invoiced in H1 2018, this represents a one-off
project that the rating agency does not anticipate at this stage to be
replicated beyond 2018 in other countries.
Moody's thus assumes that Photonis will maintain an elevated level
of leverage over the next 12-18 months at between 7.5x to
9.0x -- the large range is partly explained by the one-off
impact from the Indian contract. The very high leverage raises
concerns over the capacity of the company to refinance the senior secured
term loans before their maturity in September 2019. The Caa1 CFR
thus reflects the higher risk of default that could be triggered by,
among others, a debt write-off in order to provide the group
with a more sustainable capital structure or a distressed exchange.
Moody's views Photonis' liquidity as currently adequate.
As of September 2017, the company had EUR16 million in cash on the
balance sheet and the rating agency projects that amount to increase by
the end of FY 2017 as the fourth quarter tends to generate substantial
cash flow. Despite the significant drop in EBITDA in FY 2017 and
assuming no further deterioration over the coming quarters, the
rating agency believes that Photonis should generate flat or slightly
positive free cash flow (FCF) going forward. Moody's thus
considers that Photonis will be able to cover its needs with internal
sources of funding with no shortage of liquidity over the short-term
following the expiry of the undrawn EUR30 million RCF in September 2018.
The RCF carries one financial maintenance covenant, a net first
lien leverage ratio, with no covenant headroom as of September 2017.
The covenant will only be triggered if at least 25% of the revolver
is drawn, which Moody's considers unlikely over the coming
quarters.
The Caa1 rating on the senior secured term loans, in line with the
CFR, reflects the essentially first lien only capital structure
with the exception of the EUR30 million equivalent super senior RCF that
carries a B1 rating due to its priority ranking. The Caa1-PD
probability of default rating (PDR) reflects our standard assumption of
a 50% recovery rate for covenant-lite first lien senior
secured debt structures.
The negative outlook reflects the deterioration of the group's performance
and uncertainty as to the outlook for the next 24 months. It also
reflects the very high leverage, which positions the company weakly
in the Caa1 rating category in the context of looming debt maturities.
Factors that Could Lead to an Upgrade/Downgrade
Upward rating pressure is unlikely over the short-term.
However the outlook could be stabilized if (1) Photonis delivers a significant
increase in sales over the coming quarters while improving its orders
backlog, (2) debt-to-EBITDA decreases to below 7x
on a sustainable basis, while (3) the liquidity position remains
adequate. On the other hand, negative rating pressure could
arise if (1) the company does not return to visible revenue growth over
the coming quarters, (2) maintains its adjusted gross debt/EBITDA
at above 7x further increasing the risk of a debt restructuring or distressed
exchange at or before the maturity of the senior secured term loans,
or (3) the liquidity position weakens driven by a negative FCF.
The principal methodology used in these ratings was Global Aerospace and
Defense Industry published in April 2014. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
France-based Photonis Technologies SAS is a manufacturer of electro-optic
components used in military night vision and industry & science applications.
The company's products are key components of military night vision equipment
based on image intensification technology and its Night vision segment's
revenues represented 71% of total revenues in the first nine months
of 2017. The Scientific detectors (23%) and Power Tubes
(5%) segments leverage Photonis' know-how in terms of alternative
civil and military uses for the technology, including for nuclear
sensors or mass spectrometry. As of the last twelve months to 30
September 2017, the company generated EUR131 million in revenues
and EUR30 million in company-adjusted EBITDA. Photonis was
acquired by ARDIAN (former Axa Private Equity) in 2011.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sebastien Cieniewski
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
