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Global Credit Research - 21 Jun 2010
Approximately $1.17 billion of new rated debt obligations affected
New York, June 21, 2010 -- Moody's Investors Service assigned Ba3 Corporate Family and Probability
of Default Ratings to Delta Tucker Sub, Inc. ("Merger
Sub"), the interim company used in the proposed acquisition
of DynCorp International, Inc. ("DynCorp") by
Cerberus Capital Management, L.P. Merger Sub will
be merged with and into DynCorp at the closing of the transaction.
Concurrently, Moody's assigned a Ba1 rating to the proposed
$565 million senior secured Term Loan B and $150 million
revolving credit facilities and B1 to the proposed $455 million
senior unsecured notes, which along with about $560 million
of sponsor equity and $107 million of balance sheet cash,
will be used to finance the acquisition and repay existing debt at DynCorp
International LLC. A liquidity rating of SGL-3 was also
assigned to the new company and a ratings outlook of stable. The
transaction is anticipated to close in the second half of calendar year
2010. In a related action Moody's confirmed the existing
ratings of DynCorp International LLC detailed below. This concluded
the review for possible downgrade initiated April 12, 2010 at the
time of the buyout announcement. These ratings will be withdrawn
upon completion of the transaction.
Moody's believes that a Ba3 CFR can be maintained post the transaction
despite the significant increase in funded debt and a more than 1 turn
increase in the company's adjusted leverage. While more weakly
position in the Ba3 rating category, and any near or intermediate
term upgrade unlikely, DynCorp's financial metrics will still
remain consistent with the rating category and the expected financial
performance for the next several years should solidify its rating position.
The Ba3 Corporate Family Rating continues to reflect the company's
long and well established position as a major provider of specialized
mission critical services outsourced by the U.S. Department
of Defense and the Department of State, and its strong revenue and
operating income growth over the last several years with revenue nearly
doubling to $3.6 billion from $2.0 billion
since 2006 and operating income of over $210 million from about
$100 million in the same timeframe. Prospects for continued
growth are high with favorable industry fundamentals as the government
policy continues contractor-outsourcing to maximize combat troop
strength. DynCorp's total backlog is over $5.5
billion with an estimated remaining contract value in excess of $12
billion. Despite some combat driven slowdown in Iraq based activity,
the LOGCAP IV program which provides logistics support to U.S.
and allied forces for both combat and peacekeeping activities in southern
Afghanistan and the Administration's "soft power" strategy
should drive revenue growth over the next couple of years. With
minimal capex requirement typical of service companies and now a largely
cost-plus and time and material contract base, strong cash
flow generation is expected to provide rapid deleveraging capabilities.
The rating is further supported by the company's good liquidity profile
as evidenced by the company's expected strong cash generation, balance
sheet cash position and ample revolver availability with limited near-term
The rating however additionally considers the increased leverage as a
result of the buyout by Cerberus to over 4.0x Debt to EBITDA (per
Moody's standard adjustments), the high level of customer
and to a degree program concentration and the very significant reliance
on Middle East activity with 73% of its fiscal year 2010 revenue
coming from this region, up from 52% in 2008. The
ratings also incorporate the naturally competitive contract environment
with additional pressure likely, notably from Tier 1 OEM's
as the defense budget shifts more to O&M activity. The rating
considers the working capital stress associated with rapid revenue changes,
security clearance and personnel safety issues, as well as the risk
of cancellation or expiration of contracts without renewal reflective
of changes in government policy, priorities, and focus.
Additionally, 76% of DynCorp's revenue was derived
from task orders under IDIQ (indefinite delivery, indefinite quantity)
contracts for the 2010 year, with little likelihood of change expected
medium term. IDIQ contracts provide a basis and scope for future
activity, but do not represent firm orders and often are awarded
to multiple contractors. DynCorp's Civilian Police Program,
LOGCAP IV, Inscom, and Contract Field Teams contracts are
notable programs performed under IDIQ.
The stable outlook reflects our expectation that DynCorp will continue
to experience revenue growth driven by its substantial backlog and after
the near-term anticipation of funding working capital, it
is expected that the company will utilize free cash flow to pay down its
outstanding indebtedness and reduce leverage. The credit agreement
also includes an excess cash flow sweep.
The company's Speculative Grade Liquidity ("SGL") rating of SGL-3
post the transaction reflects expectation for the maintenance of an adequate
liquidity profile over the next four quarters following the completion
of the buyout. It is anticipated that the company's expected
near-term substantial revenue growth will require further investment
in working capital, resulting in temporary utilization of its revolving
credit facility. DynCorp is expected to have adequate covenant
cushion under the new facilities and thus full revolver availability (aside
from LC usage) during the next 12 to 18 months. The change to SGL-3
from the SGL-2 rating pre-tranaction reflects the reduction
in the size of the revolving credit facility to $150 million from
$200 million and the application of some of existing cash balances
to partially fund the acquisition.
Ratings Assigned -- Delta Tucker Sub, Inc. to be merged
with and into DynCorp International, Inc.:
Corporate Family Rating, Ba3;
Probability of Default, Ba3;
$150 million senior secured revolving credit facility, Ba1
$565 million senior secured term loan B, Ba1 (LGD2,
$455 million senior unsecured notes, B1 (LGD5, 79%);
Speculative Grade Liquidity Rating, SGL-3.
The following ratings for DynCorp International LLC (an operating subsidiary
of DynCorp International, Inc.) are confirmed and will be
withdrawn at the close of the proposed transaction:
Corporate Family Rating, Ba3;
Probability of Default, Ba3;
Senior Secured revolving credit facility, Baa3 (LGD2, 11%);
Senior Secured term loan, Baa3 (LGD2, 11%);
9.5% senior subordinated notes, B1 (LGD4, 68%);
Speculative Grade Liquidity rating, SGL-2.
The last rating action was on April 12, 2010 when DynCorp International
LLC's ratings were placed on review for possible downgrade.
The principal methodology used in rating DynCorp was Moody's Global Aerospace/Defense
Industry methodology, published in January 2007 and available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
website. Additional information on DynCorp can be found in its
Credit Opinion posted on moodys.com.
DynCorp International Inc., headquartered in Falls Church,
VA is a provider of specialized services primarily to the U.S.
Department of Defense and Department of State. The company reports
results in the following segments: Global Stabilization and Development
Solutions, Global Platform Support Solutions, and Global Linguistics
Solutions, a 51% owned joint venture. Principal services
provided by DynCorp include training civilian police in developing countries,
foreign language translation and interpretation services, eradication
of narcotics crops in Asia and Latin America, and managing aviation
and surface vehicle services and assets for the U.S. military
at locations across the U.S. and abroad. Revenues
for the fiscal year ended April 2, 2010 were approximately $3.6
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Moody's rates Delta Tucker Sub's (Dyncorp's) CFR Ba3
No Related Data.
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