TEXT - S&P rates LMI Aerospace

Tue Jan 15, 2013 4:32pm EST

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Overview
     -- LMI Aerospace Inc. (LMI) recently acquired Valent Aerostructures LLC 
(Valent) for approximately $247 million, financed mostly with debt.
     -- We are assigning our 'B+' corporate credit rating to LMI, an 
aerostructures manufacturer. 
     -- At the same time, we are assigning our 'B+' issue rating and '3' 
recovery rating to the $225 million term loan and $100 million revolving 
credit facility. 
     -- The stable outlook reflects our expectation that credit ratios will 
improve gradually over the next year as a result of earnings growth and debt 
reduction.  

Rating Action
On Jan. 15, 2013, Standard & Poor's Ratings Services assigned its 'B+' 
corporate credit rating to LMI Aerospace Inc. The outlook is stable. At the 
same time, we are assigning our 'B+' issue rating and '3' recovery rating to 
the proposed $325 million secured first-lien credit facility, which consists 
of a $100 million revolver and a $225 million term loan. The '3' recovery 
rating indicates our expectation of substantial (50%-70%) recovery in the 
event of payment default.  

Rationale
The ratings on LMI reflect our expectations that leverage will improve 
steadily over the next 12 months because of earnings growth and some debt 
reduction from free cash flow. We believe revenues and earnings will show 
solid growth over the next year because of strength in commercial aerospace 
market, good positions on popular aircraft programs, and contributions from 
Valent. We assess the company's business risk profile as "weak," as defined in 
our criteria, reflecting its position as a Tier II aerostructures supplier to 
the cyclical and competitive commercial aerospace market, relatively good 
customer and program diversity, and efficient operations. We assess the 
company's financial risk profile as "aggressive," based on the company's 
moderately high debt leverage, limited free cash flow in the next year 
(because of high capital expenditures), and adequate "liquidity." 

LMI recently acquired Valent for $247 million, financed with proceeds from a 
$225 million term loan, as well as cash and equity. Valent is a supplier of 
major, complex sub-assemblies and machine parts to leading airframe 
manufacturers in the commercial aerospace, military, and general aviation 
industries.  This expands and complements LMI's capabilities, and modestly 
improves its program and customer diversity. Credit measures are average for 
the rating, with pro forma debt to EBITDA of about 4x, funds from operations 
(FFO) to debt of 15%-20%, and EBITDA interest coverage of approximately 3.5x. 
We expect modest improvement over the next 12 months because of growing 
earnings due to strength in the commercial aerospace market as well as modest 
debt reduction from free cash flows. In 2013, we expect debt to EBITDA to 
decline to 3x-3.5x and FFO to debt to improve to about 20%, absent further 
debt-financed acquisitions. 

LMI provides design engineering services, structural assemblies, and kits and 
components for large commercial aircraft (50% of sales pro forma for the 
Valent acquisition), business and regional jets (23%), military (17%), and 
other markets (10%), which includes technology, testing, and commercial 
consulting services. Some of the company's products include fuselage and wing 
skins and assemblies, helicopter components, and machined spars and ribs as 
well as design and engineering services. The acquisition of Valent broadens 
LMI's manufacturing capabilities and expands their position on major 
platforms, especially the very popular Boeing 737. The combined company should 
be able to compete for larger, more complex assemblies.  

The commercial aerospace market is currently in a cyclical upturn, and the 
major aircraft and engine manufacturers are increasing production 
significantly to work down huge order backlogs. Although defense spending is 
likely to be flat to declining for the foreseeable future, military platforms 
comprise only 17% of total pro forma revenues, and funding for the company's 
major military programs should be relatively stable in the next year. 

LMI has good program diversity for the size of the company. On the commercial 
aerospace side, the combined company will have content on the Boeing 737, 747, 
777, and 787, as well as the Gulfstream G450, G550, and G650 business jets. On 
the military side, programs include the Blackhawk helicopter, F-18 fighter, 
and V-22 tilt-rotor. The company's customer base is limited, as is typical for 
an aerospace supplier. Although the top seven customers will still comprise 
more than 75% of sales, pro forma for the acquisition, the largest customer 
will change from Boeing to Spirit Aerosystems (which itself sells mostly to 
Boeing), which will account for more than 25% of combined sales.

Liquidity
We believe that liquidity will be "adequate," pro forma for the recent 
transaction. We expect sources of liquidity to exceed uses by at least 1.2x in 
the next 12 months and that sources will exceed uses even if EBITDA were to 
decline by 15%, the minimum required levels under our criteria for an adequate 
designation.

We expect the company to have minimal cash balances after the acquisition, but 
liquidity will be supported by a $100 million revolver ($6.2 million drawn at 
close). We expect free cash flow to be modest in 2013 due to relatively high 
capital expenditures, but cash flow should improve to more than $20 million in 
2014 as capital expenditures return to historical levels. Debt maturities are 
minimal over the next few years, primarily the $2.3 million per year of 
amortization on the term loan. We expect the company to maintain at least 25% 
cushion in the leverage and interest coverage covenants in the new credit 
facility, for at least the next year.

Recovery analysis
Please see the recovery report to be published shortly on RatingsDirect.

Outlook
The outlook is stable. Revenues and earnings should see solid growth over the 
next year due to higher production of commercial aircraft and improving 
margins. We expect that higher earnings and debt reduction using excess free 
cash flow should result in steadily improving credit ratios. We do not expect 
to raise the ratings in the next year but could do so if cash flow and debt 
reduction is greater than we expect, resulting in debt to EBITDA below 3x and 
FFO to debt above 25%. We are also unlikely to lower the ratings, but if 
lower-than-expected earnings or material debt-financed acquisitions result in 
debt to EBITDA increasing above 5x or FFO to debt declining below 12%, and we 
expect the measures to remain there, we could downgrade the company.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Standard & Poor's Standardizes Liquidity Descriptors for Global 
Corporate Issuers, July 2, 2010 
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Aerospace And Defense Industries, June 24, 2009


Ratings List
New Rating; Outlook Stable

LMI Aerospace Inc.
 Corporate Credit Rating                B+/Stable/--       

New Rating

LMI Aerospace Inc.
 Senior Secured                                          
  $100 mil rev bank ln due 2017         B+                 
   Recovery Rating                      3                  
  $225 mil term loan bank ln due 2017   B+                 
   Recovery Rating                      3
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