New York, April 01, 2020 -- Moody's Investors Service ("Moody's") placed its ratings for TransDigm,
Inc. on review for downgrade.
"The review for downgrade reflects Moody's expectation that the
coronavirus will have a significant adverse impact on commercial aerospace
traffic volumes for at least the balance of 2020," says Eoin Roche,
Moody's lead analyst for TransDigm.
TransDigm's heavy exposure to commercial aerospace is likely to
make the company highly vulnerable to a slowdown. As such,
Moody's anticipates meaningful sales and earnings headwinds over
the next few quarters, and a weakening of TransDigm's key
credit metrics.
"The pending earnings pressures from the coronavirus are likely to be
particularly pronounced in TransDigm's high-margin commercial
aftermarket business and will coincide with an already highly leveraged
balance sheet, with Moody's-adjusted debt-to-EBITDA
of about 7.3x as of December 2019, limiting near-term
financial flexibility," according to Roche.
RATINGS RATIONALE
The B1 corporate family rating balances an aggressive financial policy,
considerable tolerance for risk and elevated financial leverage against
TransDigm's strong competitive standing, supported by the proprietary
and sole-sourced nature of the majority of its products.
TransDigm pursues an aggressive financial policy that seeks private equity-like
returns with a focus on shareholder-friendly initiatives that entail
cash distributions as a key priority. Leverage remains highly elevated
and the company's commercial OEM and commercial aftermarkets seem likely
to face a much more difficult operating environment over the next few
quarters. Moody's does not expect the ongoing grounding of the
737 MAX program to have a material adverse impact on TransDigm's financial
profile.
The rapid and widening spread of the coronavirus outbreak, the deteriorating
global economic outlook, falling oil prices and asset price declines
are creating a severe and extensive credit shock across many sectors,
regions and markets. The combined credit effects of these developments
are unprecedented. The aerospace sector has been adversely affected
by the shock given its indirect sensitivity via the airline industry to
consumer demand and market sentiment. More specifically,
the weaknesses in TransDigm's credit profile, including its
exposure to commercial aerospace, have left it vulnerable to shifts
in market sentiment in these unprecedented operating conditions,
and the company remains vulnerable to the outbreak continuing to spread.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's actions reflect the impact on TransDigm
of the breadth and severity of the shock, and the broad deterioration
in credit quality it has triggered.
Moody's review will primarily consider: (1) the likely degree and
duration of the financial impact of the coronavirus on TransDigm's
commercial aftermarket and OEM businesses, including its forward
revenue, earnings and cash flow profile; (2) TransDigm's
ability to reduce its cost structure in the face of what are likely to
be meaningfully lower volumes over the balance of 2020; (3) the company's
liquidity profile, including anticipated cash balances, future
free cash generation, the sufficiency of external sources of financing
if needed, and the likelihood of compliance with financial covenants;
and (4) TransDigm's aggressive financial policies by which the company
is governed, and the likely allocation of capital that it will pursue
over the next few quarters.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include debt-to-EBITDA
sustained below 5x on a Moody's-adjusted basis, coupled with
maintenance of the company's industry leading margins and continuation
of a strong liquidity profile.
Factors that could lead to a downgrade include Moody's-adjusted
debt-to-EBITDA remaining in the high-7x range,
or an inability or an unwillingness to reduce financial leverage back
towards 7x; an inability to continue to make regular price increases
or expectations of pricing pressure from aftermarket customers such that
EBITDA margins are expected to remain around 40%; or a deteriorating
liquidity profile involving FCF-to-Debt (excluding dividends)
continuously below 5%, annual cash flow from operations sustained
below $900 million and/or a reliance on revolver borrowings.
The following is a summary of Moody's ratings and today's rating actions:
On Review for Downgrade:
..Issuer: TransDigm Inc.
....Corporate Family Rating, Placed
on Review for Downgrade, currently B1
....Probability of Default Rating, Placed
on Review for Downgrade, currently B1-PD
....Senior Subordinated Regular Bond/Debenture,
Placed on Review for Downgrade, currently B3 (LGD5)
....Senior Secured Bank Credit Facility,
Placed on Review for Downgrade, currently Ba3 (LGD3)
....Senior Secured Regular Bond/Debenture,
Placed on Review for Downgrade, currently Ba3 (LGD3)
..Issuer: TransDigm Holdings UK plc
....Senior Subordinated Regular Bond/Debenture,
Placed on Review for Downgrade, currently B3 (LGD5)
Unchanged:
..Issuer: TransDigm Inc.
....Speculative Grade Liquidity Rating,
unchanged at SGL-1
Outlook Actions:
..Issuer: TransDigm Inc.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: TransDigm Holdings UK plc
....Outlook, Changed To Rating Under
Review From Stable
TransDigm Inc., headquartered in Cleveland, Ohio,
is a manufacturer of engineered aerospace components for commercial airlines,
aircraft maintenance facilities, original equipment manufacturers
and various agencies of the US Government. TransDigm Inc.
is the wholly-owned subsidiary of TransDigm Group Incorporated
(TDG). Revenues for the twelve-month period ended December
31, 2019 were $5.7 billion.
The principal methodology used in these ratings was Aerospace and Defense
Industry published in March 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108840.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued [with/with no] amendment resulting from that
disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Eoin Roche
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
