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Rating Action:

Moody's raises Aeroflex's CFR to B1, assigns B1 to new senior secured credit facilities; outlook stable

26 Apr 2011

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.

RATINGS RATIONALE

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 category.

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, 49%)

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 markets.

REGULATORY DISCLOSURES

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.

New York
Gregory A. Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Jankowitz
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises Aeroflex's CFR to B1, assigns B1 to new senior secured credit facilities; outlook stable
No Related Data.
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