Approximately $553 million of rated debt affected
New York, December 22, 2010 -- Moody's Investors Service has lowered the rating on Aeroflex Incorporated's
("Aeroflex") senior secured first lien revolver due 2013 and
(first-out) senior secured term loan due 2014 to Ba3 from Ba2;
lowered the rating on the (first-loss) senior secured term loan
due 2014 to B3 from B2; and revised the LGD point estimate on the
11.75% senior subordinated unsecured PIK term loan due 2015
(PIK term loan) in accordance with Moody's LGD Methodology.
All other Aeroflex ratings remain unchanged and the rating outlook remains
stable. The rating actions and LGD revision result from Aeroflex's
recent purchase of a portion of the 11.75% senior notes
due 2015 (unrated) and PIK term loan following the company's November
2010 tender offer announcement.
Following is a summary of today's rating actions and assessment
revisions, and Aeroflex's current ratings:
$ 50 Million Senior Secured First Lien Revolver due 2013 to Ba3
(LGD-2, 25%) from Ba2 (LGD-2, 19%)
$373 Million (originally $400 Million) (First-Out)
Senior Secured Term Loan due 2014 to Ba3 (LGD-2, 25%)
from Ba2 (LGD-2, 19%)
$116 Million (originally $125 Million) (First-Loss)
Senior Secured Term Loan due 2014 to B3 (LGD-4, 66%)
from B2 (LGD-4, 53%)
..LGD Assessment Revisions:
$ 14 Million (originally $120 Million) 11.75%
Senior Subordinated Unsecured PIK Term Loan due 2015, currently
Caa1, LGD assessment revised to (LGD-6, 96%)
from (LGD-6, 92%)
Corporate Family Rating -- B2
Probability of Default Rating -- B2
Speculative Grade Liquidity Rating affirmed -- SGL-2
The downgrade of the senior secured debt obligations is due to the reduced
size of the unsecured creditor class (roughly $207 million outstanding
following the debt purchases vs. $345 million outstanding
previously) relative to the size of the senior secured creditor class,
which remained the same after the debt repayments (i.e.,
$373 million first-out term loan and $50 million
first lien revolver). Essentially, the senior secured creditor
class must now absorb a disproportionately higher amount of losses under
Moody's LGD framework given the reduced amount of junior debt in
the capital structure.
When we upgraded Aeroflex's Corporate Family (CFR) and debt ratings
in September 2010, our press release noted that "to the extent
an IPO is consummated and proceeds (depending on offering size) allocated
to meaningfully reduce the unsecured debt obligations maturing 2015,
ratings on the secured term loans would possibly experience a one-notch
downgrade. The downgrade would result from the reduction of unsecured
obligations in the consolidated capital structure, requiring the
senior secured creditor class to absorb a higher loss under Moody's
Loss Given Default Methodology."
In November 2010, Aeroflex went public via an IPO and sold 19.8
million ordinary common shares (includes the overallotment option exercised
by the underwriters) at a price of $13.50/share.
The company used a portion of the net proceeds to reduce the 11.75%
senior notes by roughly $32.2 million to $193 million
and to reduce the PIK term loan by approximately $154.4
million to $14 million.
Aeroflex's B2 CFR continues to reflect the company's moderately
high financial leverage (5.1x adjusted debt to LTM EBITDA pro forma
for debt repayments, adjusted for operating leases and 25%
debt treatment for hybrid securities), thin credit protection measures,
modest scale and limited asset protection from a small base of tangible
assets. It also captures the company's exposure to customers
in volatile wireless and networking verticals and to government-policy
dependent aerospace / defense electronics end markets. The rating
takes into account Moody's hybrid security treatment for the original
$372 million of sponsor preferred-like member interests
in which 25% of the equity is treated as debt-like.
At the same time, the B2 CFR considers Aeroflex's leading market
position as the primary or sole source provider in niche markets,
strong intellectual property portfolio with proprietary technology,
and highly visible and diversified revenue base with no specific defense
platform exposure. It also incorporates the company's stable
competitive landscape, mission-critical products with high
switching costs resulting in relatively stable and high gross margins
(50%), good operating profitability and positive free cash
flow (FCF) given its low capex fabless operating model.
The SGL-2 rating reflects Aeroflex's good liquidity from
internal sources, which consists of $65 million of cash balances
as of September 30, 2010 and our expectation for solid FCF levels
in fiscal 2011. External liquidity is supported by full access
to an undrawn $50 million revolver. We expect Aeroflex to
remain compliant with its financial covenants over the next year.
The stable rating outlook reflects the company's exposure to the
less cyclical aerospace/defense (government) sector, well-diversified
product portfolio in which Aeroflex is the only (or principal) supplier
and a rich portfolio of new products expected to ramp and contribute to
revenue growth in fiscal 2011.
Aeroflex's ratings could experience upward pressure to the extent
the company is able to: de-lever through expanded EBITDA
and/or debt reduction resulting in total debt to EBITDA (Moody's adjusted)
under 4.5x; and drive top-line revenue growth via effective
R&D investments and product development targeted to moving up the
value chain, and continued progress towards increasing the dollar
content in existing programs and broadening applications for existing
technologies into new end markets.
Ratings could migrate lower if: Aeroflex experienced an erosion
in its competitive position or product functionality due to under-investment
in R&D, as evidenced by below market revenue growth, diminished
pricing power or significant customer losses; the company suffers
a sustained contraction in gross and operating margins, increases
financial leverage above 7.0x or materially increases capital expenditures
leading to negative FCF generation on a sustained basis; the company's
liquidity position were to weaken; or there was a material change
in the business profile.
Moody's subscribers can find additional information in the Aeroflex
Credit Opinion published on www.moodys.com.
The last rating action was on September 30, 2010 when Moody's
upgraded Aeroflex's CFR to B2 from B3, upgraded the term loans
and revolver by one notch and changed the outlook to stable from positive.
The principal methodologies used in this rating were Global Semiconductor
Industry published in November 2009, and Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Aeroflex, headquartered in Plainview, NY, is a fabless
specialty provider of microelectronics and test and measurement products
to the aerospace, defense, wireless, broadband and medical
markets. For the twelve months ended September 30, 2010 (LTM)
revenues were $681 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's lowers Aeroflex's senior secured loan ratings following unsecured debt repayments; outlook stable
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