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Rating Action:

Moody's rates Delta Tucker Sub's (Dyncorp's) CFR Ba3

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 These ratings will be withdrawn upon completion of the transaction.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 usage expected.

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 (LGD2, 27%);

$565 million senior secured term loan B, Ba1 (LGD2, 27%);

$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 billion.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates Delta Tucker Sub's (Dyncorp's) CFR Ba3
No Related Data.
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