TEXT-S&P downgrades IAP Worldwide Services to 'SD'
Overview -- U.S.-based technical and logistics services provider IAP Worldwide Services Inc. has amended and extended its first- and second-lien credit facilities. -- We view the transaction as tantamount to default because the offer was, in our view, distressed and resulted in debtholders receiving less value than the promise of the original securities. -- We are lowering our corporate credit rating on IAP to 'SD' (selective default) from 'CCC' and the issue-level ratings on the credit facilities to 'D', and subsequently withdrawing the issue ratings. -- We expect to reassess our corporate credit rating on IAP over the next few weeks and that it will likely be in the 'CCC' category but could possibly be as high as 'B-'. Rating Action On Nov. 29, 2012, Standard & Poor's Ratings Services lowered its ratings on Cape Canaveral, Fla.-based IAP Worldwide Services Inc. (IAP), including the corporate credit rating to 'SD' from 'CCC'. We also lowered our first-lien senior secured issue ratings to 'D' from 'CCC' and second-lien senior secured issue ratings to 'D' from 'CC'. We subsequently withdrew our issue ratings. Rationale The rating actions reflect our view that the amendment and extension of the credit facilities are a de facto restructuring and, thus, are tantamount to a default according to our criteria. Although IAP debtholders were offered an increase in the interest rates on the new debt, we believe the increase in pricing did not adequately compensate lenders for the extension of maturities, which, under our criteria, resulted in lenders receiving less value than the promise of the original securities. We believe that lenders accepted IAP's offer largely because of the perceived risk that the issuer may not otherwise fulfill its original obligations. We view this exchange as distressed rather than opportunistic. If we receive adequate information, we expect to reassess our corporate credit rating on IAP over the next few weeks. It is our preliminary expectation that the corporate credit rating will likely be in the 'CCC' category but could possibly be as high as 'B-'. Alternatively, we would withdraw the corporate credit rating if we do not receive adequate information. Although the transaction was not a deleveraging event, the post-exchange capital structure alleviates IAP's near-term debt maturities as the first-lien credit facility was due to expire at the end of this year. However, we still consider IAP's financial risk profile to be "highly leveraged." Despite the recent refinancing, we assess the company's liquidity as "less than adequate" under our criteria because of potentially tight covenant headroom and our view that the company does not have the capacity to absorb low probability adversities. The ratings on IAP also reflect our revised view of the company's business risk profile as "vulnerable" instead of "weak." The business is marked by revenue concentration from large contracts and the less-predictable nature of contingency operations. We believe potential cuts in federal defense spending, given current deficit-reduction efforts, present risks to demand for IAP's services over time. Although the company has a good rebid record on contracts and low fixed capital requirements, we believe its EBITDA margin will remain thin at less than 10%. We believe the company's margins are consistent with a highly competitive market for its services. In addition, we score IAP's management and governance as "weak," mainly because of our negative view on the company's controlling ownership, which we believe has engaged in very aggressive financial policy since 2005 that promotes the owners interests above those of other stakeholders. Related Criteria And Research -- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 -- General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Downgraded To From IAP Worldwide Services Inc. Corporate Credit Rating SD/-- CCC/Watch Dev/-- Senior Secured Second Lien D CC/Watch Dev Recovery Rating 6 6 Senior Secured First Lien D CCC/Watch Dev Recovery Rating 3 3 Ratings Withdrawn To From IAP Worldwide Services Inc. Senior Secured Second Lien NR D Recovery Rating NR 6 Senior Secured First Lien NR D Recovery Rating NR 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.