Approximately $800 million of new debt rated
New York, April 26, 2011 -- Moody's Investors Service upgraded the Corporate Family (CFR) and
Probability of Default (PDR) Ratings of Aeroflex Incorporated ("Aeroflex")
to B1 from B2, upgraded the ratings on the existing revolver and
first-out term loan to Ba2 from Ba3, upgraded the first-loss
term loan to B2 from B3, upgraded the senior subordinated PIK term
loan to B3 from Caa1 and affirmed the SGL-2 speculative grade liquidity
rating. Moody's also assigned B1 ratings to the proposed
senior secured credit facilities, consisting of a new $725
million Term Loan B due 2018 and $75 million Revolver due 2016.
The rating outlook is stable.
The ratings upgrade "reflects the company's solid revenue
growth and operating margin and EBITDA expansion, plus our expectation
for improvement in free cash flow and further reduction in total debt
to EBITDA to below the 4x level," according to Moody's
Vice President, Gregory Fraser. Moody's expects Aeroflex's
operating performance will continue to benefit from continued R&D
investments, targeted product development and technologies acquired
from several small acquisitions that have strengthened the company's
portfolio as well as improved product mix resulting in a higher margin
profile on a sustained basis.
We expect Aeroflex to continue to de-lever through a combination
of EBITDA expansion and debt repayment. This should result in total
debt to EBITDA (Moody's adjusted) declining to at least 3.7x
by June 2012 (fiscal year end) versus 5.2x as of December 31,
2010. To the extent the proposed refinancing is completed,
we expect Aeroflex to realize approximately $14 million in cash
interest savings, which is in addition to the $30 million
in savings already realized from the recent debt reduction resulting from
last year's IPO proceeds. This should further improve debt
protection measures and position the company more solidly in the B1 rating
The rating revision also incorporates our view that Aeroflex's operating
performance and earnings are less volatile and more consistent across
business cycles relative to its rated peers in the semiconductor space.
The stable rating outlook reflects the company's exposure to the
less cyclical aerospace & defense (government) sector, well-diversified
portfolio in which Aeroflex is the only (or principal) supplier for over
80% of its revenues and a rich portfolio of new products expected
to ramp and contribute to revenue growth in fiscal 2012.
The SGL-2 rating recognizes Aeroflex's good liquidity from
internal sources, which consists of $71 million of cash balances
as of December 31, 2010 and our expectation of solid free cash flow
generation over the next 12 months. External liquidity is supported
by full access to an undrawn $50 million revolver maturing 2013.
Our liquidity and long-term ratings incorporate our expectation
that Aeroflex will refrain from dividend payments.
Given today's ratings revision, it is unlikely an upgrade
could occur over the near-term. However, longer-term
Aeroflex's ratings could be upgraded if the company is able to:
(i) de-lever through expanded EBITDA and/or debt reduction resulting
in total debt to EBITDA (Moody's adjusted) to at least 3.0x on
a sustained basis; and (ii) drive top-line revenue growth
and margin expansion via effective R&D investments and product development
targeted to moving up the value chain.
Ratings could be downgraded if Aeroflex experienced an erosion in its
competitive position, suffers a sustained contraction in gross and
operating margins or increases total debt to EBITDA above 5.0x
(Moody's adjusted). If Aeroflex were to engage in more aggressive
financial policies or experience weakening liquidity, ratings could
also be downgraded.
Aeroflex is pursuing this transaction to refinance its entire debt capital
structure. Ratings on the existing credit facilities will be withdrawn
upon completion of the refinancing.
Moody's notes that the two-notch rating differential between
the existing senior secured first-out credit facilities (rated
Ba2) and the new senior secured credit facilities (rated B1) is due to
the elimination of junior debt (i.e., senior secured
first-loss term loan, senior unsecured notes and senior subordinated
PIK term loan) from the proposed capital structure. Since the new
senior secured creditor class is expected to be the only tranche of debt
in the contemplated debt capital structure, it must now absorb a
higher amount of losses under Moody's Loss Given Default Methodology,
resulting in the B1 rating.
The following ratings were upgraded:
Corporate Family Rating to B1 from B2
Probability of Default Rating to B1 from B2
$ 50 Million Senior Secured First Lien Revolver due 2013 to Ba2
(LGD-2, 25%) from Ba3 (LGD-2, 25%)
$373 Million (originally $400 Million) (First-Out)
Senior Secured Term Loan due 2014 to Ba2 (LGD-2, 25%)
from Ba3 (LGD-2, 25%)
$116 Million (originally $125 Million) (First-Loss)
Senior Secured Term Loan due 2014 to B2 (LGD-4, 66%)
from B3 (LGD-4, 66%)
$14 Million (originally $120 Million) Senior Subordinated
Unsecured PIK Term Loan due 2015 to B3 (LGD-6, 96%)
from Caa1 (LGD-6, 96%)
The following rating was affirmed:
Speculative Grade Liquidity Rating affirmed at SGL-2
The following new ratings were assigned:
$ 75 Million Senior Secured Revolving Credit Facility due 2016
-- B1 (LGD-3, 49%)
$725 Million Senior Secured Term Loan B due 2018 -- B1 (LGD-3,
The assigned ratings are contingent on the review of final documentation
and no material change in the terms and conditions of the debt transaction
as advised to Moody's.
Moody's subscribers can find additional information in the Aeroflex
Credit Opinion published on www.moodys.com.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last Credit Rating Action and the rating history.
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. Other methodologies and
factors that may have been considered in the process of rating this issuer
can also be found on Moody's website.
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
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information,
and confidential and proprietary Moody's Analytics' information.
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
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises Aeroflex's CFR to B1, assigns B1 to new senior secured credit facilities; outlook stable
250 Greenwich Street
New York, NY 10007