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Rating Action:

Moody's upgrades DynCorp International's CFR to B3 from Caa2; 1st lien facilities to Ba3, 2nd lien to Caa1

19 May 2017

Approximately $664 million of rated debt

New York, May 19, 2017 -- Moody's Investors Service ("Moody's") has upgraded the ratings of DynCorp International, Inc. ("DI"). The Corporate Family Rating was upgraded two notches to B3 from Caa2, the first lien revolving credit and term loan to Ba3 from B1 and the second lien guaranteed notes to Caa1 from Caa2. The speculative grade liquidity rating has been upgraded to SGL-3 from SGL-4. The rating outlook is stable.

RATINGS RATIONALE

The two-notch CFR upgrade reflects sales momentum within the business and the recent capital infusion from, an affiliate of sponsor, Cerberus that enabled DI to redeem the remaining $39.3 million principal amount of senior 10 3/8% unsecured notes due 2017. The rating anticipates that the recently improved revenue and margin performance should continue. Total debt was reduced by $64 million over the first four months of 2017, 10% of debt outstanding at year-end 2016. Additionally, the company's book to bill has exceeded 1x, with substantially rising backlog since Q2-2016.

However, the B3 CFR incorporates DI's still high financial leverage, modest operating margins and interest coverage against a long-established brand within the international mission support sector of defense contracting, a broad geographic presence and service capabilities. Pro forma for debt reduction during the first four months of 2017, debt/EBITDA is in the high 5x range on a Moody's adjusted basis.

The company has been achieving solid contract execution scores from customers and a good degree of contract re-compete success of late. The $250 million of annual revenue associated with the INL Airwing program, which a competitor won, is, in Moody's view, likely to trail off later this year (DI is pursuing legal recourse to retain the contract). But the loss-making T-6 Combs contract portion ended in April and volumes have been ramping under other contracts, such as LOGCAP IV.

We anticipate annual free cash flow generation of $20 million near-term with free cash flow to debt in the low single digit percentage range. Last twelve month account receivables days on hand declined to 67 days from 79 days since 2015, generating substantial cash flow for DI. We expect the improved billing efficiency to continue near-term because the contract-specific issues that slowed collections have rectified.

The stable rating outlook reflects progress on other operational initiatives commenced more than 18 months ago when DI named a permanent CEO. Of late, contract renewals and scope expansion under existing programs suggest progress from DI's heightened emphasis on program execution standards and a more rigorous business development processes.

The progress seems well timed because expanding military operational tempo within the Middle East and growing emphasis on maintenance/readiness spending by the US Department of Defense offer bid opportunities.

The term loan does not mature until July 2020, enabling management to focus on winning new contracts and furthering backlog. Past financial support from ownership (Cerberus), including $30 million of third lien debt contributed in April 2016 and $33.9 million contributed in April 2017, represents another supportive consideration.

The speculative grade liquidity rating upgrade to SGL-3 from SGL-4, denotes the restoration of liquidity profile adequacy. With estimated cash of $82 million following the note redemption and a $25 million term loan prepayment in April, revolver borrowing will likely not be required for operational needs and the July 2018 scheduled term loan amortization of $22.5 million. The cash gives cushion to cover working capital swings and helps DI meet the bank facility's minimum liquidity covenant, that steps down to $50 million from $60 million after 2017.

The debt instrument ratings have risen by one notch despite the two-notch CFR upgrade because the recently redeemed unsecured notes were a loss-absorbing layer of (effectively junior) debt capital to the secured facilities.

Upward rating momentum would depend on expectation of material revenue growth, debt/EBITDA closer to 5x, free cash flow to debt in the high single digit percentage range, and continued liquidity profile adequacy.

Downward rating pressure would follow negative contract developments, backlog erosion, or weaker liquidity.

The following rating actions were taken:

Upgrades:

..Issuer: DynCorp International Inc.

.... Probability of Default Rating, Upgraded to B3-PD from Caa2-PD

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

.... Corporate Family Rating, Upgraded to B3 from Caa2

....Senior Secured Bank Credit Facility, Upgraded to Ba3 (LGD2) from B1 (LGD2)

....Backed Senior Secured Regular Bond/Debenture, Upgraded to Caa1 (LGD4) from Caa2 (LGD4)

Outlook Actions:

..Issuer: DynCorp International Inc.

....Outlook, Remains Stable

DynCorp International Inc., headquartered in McLean, VA, provides mission-critical support services outsourced by US military, nonmilitary US governmental agencies and foreign governments. The company is an operating subsidiary of Delta Tucker Holdings, Inc., which is owned by affiliates of Cerberus Capital Management, LP. Revenues in 2016 were approximately $1.84 billion.

The principal methodology used in these ratings was Global Aerospace and Defense Industry published in April 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Herskovics
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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