TEXT - S&P raises IAP Worldwide Services rating to CCC-plus

Thu Dec 20, 2012 2:23pm 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 are raising the corporate credit rating on IAP to 'CCC+' from 'SD' 
given ongoing market uncertainty, potentially tight covenant headroom.
     -- The developing outlook reflects the potential for a higher rating if 
the company can improve and maintain credit measures, such as adjusted debt to 
EBITDA of 5x or less, and reflects the potential for a lower rating if 
covenant headroom remains tight.

Rating Action
On Dec. 20, 2012, Standard & Poor's Ratings Services raised its corporate 
credit rating on Cape Canaveral, Fla.-based IAP Worldwide Services Inc. (IAP) 
to 'CCC+' from 'SD'. The outlook is developing.

Rationale
The rating action reflects our expectation that credit measures will remain 
very weak for at least the next year and that sustainable improvement will be 
subject to external factors, such as declining government defense spending and 
management's ability to diversify into adjacent services. The recent amendment 
and extention of the company's credit facilities by three years affords some 
time for management to execute its strategy, which includes increasing 
penetration outside of its traditional U.S. government customers. 

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" with adjusted 
debt to EBITDA likely to exceed 7x at year-end. 

The ratings on IAP also reflect our view of the company's business risk 
profile as "vulnerable." The business is marked by inherent risks associated 
with contract bidding, fixed price contract execution, a competitive 
landscape, 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 historically had a good rebid record on 
contracts and low fixed capital requirements, we believe its EBITDA margin 
will remain thin at less than 10%, which is 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. We maintain 
this assessment in spite of the fact that the controlling shareholder, 
Cerberus, does not control a majority of the company's board seats and our 
view that the company's relatively new management team is pursuing a necessary 
strategy to diversify its revenue streams to offset the likely reduction of 
work in war theatres over time. However, the ability of IAP's management teams 
to meet budgeted levels of operating performance since 2005 has been spotty.

Liquidity
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 company has ample availability under its $55 million revolver that expires 
at the end of 2015. The revolver amount will step down to $50 million in early 
2013, but the company has the option to increase this amount to $70 million if 
it can receive commitments from its lenders. The company's first-lien term 
loan now matures at the end of 2015 and has close to $320 million outstanding 
and will amortize at about 4% (or $12 million) annually. The $132 million 
second-lien term loan matures in mid-2016 and pays part-cash, 
part-payment-in-kind interest. The company is subject to a minimum EBITDA 
covenant that begins to ramp up from current levels in the first quarter of 
2014.

The company also benefits from decent cash balances ($55 million at the end of 
the third quarter) and from a sponsor note of $75 million that provides 
liquidity to fund working capital in the event of certain emergency services 
work.

Outlook
The outlook is developing. We could raise the rating if we expect IAP to 
maintain debt to EBITDA of about 5x or less, generate positive free cash flow, 
and have a greater degree of comfort that capital markets would be open and 
available to refinance the company's 2015 maturities. We believe successful 
execution of the company's strategy to enter adjacent markets could lead to 
this outcome. We could lower the rating if covenant headroom remains less than 
10% or if free cash flow generation becomes negative.

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
Upgraded; Outlook Developing
                                        To                 From
IAP Worldwide Services Inc.
 Corporate Credit Rating                CCC+/Developing/-- SD/--/--
FILED UNDER:
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