TEXT-S&P downgrades IAP Worldwide Services to 'SD'

Thu Nov 29, 2012 2:18pm EST

Related Topics

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.
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