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I AGREE
30 Sep 2010
Approximately $727 million of rated debt affected
New York, September 30, 2010 -- Moody's Investors Service upgraded the Corporate Family (CFR) and
Probability of Default (PDR) Ratings of Aeroflex Incorporated ("Aeroflex")
to B2 from B3, upgraded the ratings on the term loans by one notch
and affirmed its SGL-2 speculative grade liquidity rating.
The rating outlook was changed to stable from positive.
The following is a summary of today's rating actions:
Corporate Family Rating to B2 from B3
Probability of Default Rating to B2 from B3
$50 Million Senior Secured First Lien Revolver due 2013 to Ba2
(LGD-2, 19%) from Ba3 (LGD-2, 19%)
$389 Million (originally $400 Million) (First-Out)
Senior Secured Term Loan due 2014 to Ba2 (LGD-2, 19%)
from Ba3 (LGD-2, 19%)
$122 Million (originally $125 Million) (First-Loss)
Senior Secured Term Loan due 2014 to B2 (LGD-4, 53%)
from B3 (LGD-4, 54%)
$166 Million (originally $120 Million) Senior Subordinated
Unsecured PIK Term Loan due 2015 to Caa1 (LGD-6, 92%)
from Caa2 (LGD-6, 92%)
Speculative Grade Liquidity Rating affirmed at SGL-2
RATINGS RATIONALE
The upgrade of Aeroflex's CFR to B2 reflects the company's
solid revenue growth and strong EBITDA expansion across both the Microelectronics
and Test Solutions business segments plus improvement in leverage metrics
and free cash flow (FCF) following the recovery in demand for semiconductors
and test and measurement products. Aeroflex experienced 9%
year-over-year revenue growth as a result of expanded R&D
investments, targeted product development and a string of small
acquisitions that strengthened the company's product portfolio.
This enabled it to move up the value chain by introducing new products
for existing end markets and broadening the applications of existing technologies
into new end markets. In fiscal 2010, Aeroflex witnessed
good customer uptake for integrated circuits, microelectronic modules
and wireless test products, which carry richer margins than the
corporate average, and a favorable product mix shift in motion control,
radio test and avionics products, all of which led to improvement
in the company's consolidated gross margins.
The rating revision considers the improvement in adjusted leverage (6.4x
total debt to EBITDA in FY10 compared to 7.9x in FY09) and FCF
generation ($61 million FCF in FY10 vs. $36 million
in FY09), as well as the expectation that adjusted leverage will
continue to improve as a result of continued EBITDA growth and potential
debt reduction.
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. The stable outlook takes into account
our expectation that increasing government-related backlog,
improving customer and product diversification and new ATS programs will
result in enhanced EBITDA and cash flow performance.
The SGL-2 rating reflects Aeroflex's good liquidity from
internal sources, which consists of $101 million of cash
balances as of June 30, 2010 and our expectation of solid FCF levels
in fiscal 2010. 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.
We note 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
debt capital structure, requiring the senior secured creditor class
to absorb a higher loss under Moody's Loss Given Default Methodology.
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) at
or 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 principal methodologies used in rating Aeroflex 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. For the fiscal year ended June 30, 2010, revenues
and EBITDA (Moody's adjusted) were $655 million and $168
million, respectively.
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,
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 maintaining
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
Andris G. Kalnins
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.
Moody's raises Aeroflex's CFR to B2; outlook stable
No Related Data.
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