Fitch Upgrades TransDigm's Sr Secured Rtg & Affirms IDR at 'B'; Outlook Revised to Stable
NEW YORK--(Business Wire)--
Fitch Ratings has affirmed the Issuer Default Ratings (IDR) for
TransDigm Group Inc. (NYSE: TDG) and its indirect subsidiary
TransDigm, Inc. (TDI); upgraded the senior secured credit facility;
and affirmed the senior subordinated notes as follows:
TDG:
--Long-term IDR affirmed at 'B';
TDI:
--IDR affirmed at 'B';
--Senior secured bank credit facility upgraded to 'BB/RR1' from
'BB-/RR2';
--Senior subordinated notes affirmed at 'B-/RR5'.
Fitch has revised the Rating Outlook to Stable from Negative.
Approximately $1.35 billion of debt is affected by these rating
actions.
The ratings reflect TDG's solid credit support in the form of
strong free cash flow; very high profit margins; a diverse portfolio
of products for a variety of commercial and military platforms and
programs; the company's role as a sole source provider for the bulk of
its sales; significant aftermarket business (about 60% of FY2007
sales); military sales that help to offset the cyclicality of
commercial jet manufacturing; and management's history of successful
acquisitions and subsequent integration. Concerns relate to TDG's high
leverage; the size or number of potential acquisitions going forward
and the risks of integrating them successfully; weak collateral
support; the possibility of a change to cost-based pricing for some
government related work; and the potential for exogenous shocks to the
commercial aerospace market.
The Rating Outlook revision to Stable from Negative reflects the
current strong environment for commercial and military aircraft
production and continued growth in the commercial aftermarket due to
the ageing of fleets, increasing air travel, and continued operations
for the U.S. military. In addition, higher earnings and profitability
have steadily brought leverage down from the elevated levels reached
after several acquisitions last year. Although the fundamental
operating trend is positive, the company maintains an open stance
towards acquisitions and has not articulated a cash deployment
strategy directed toward debt reduction, which constrains the ratings
in the medium term.
The Recovery Ratings and notching in the debt structure reflect
Fitch's recovery expectations under a scenario in which distressed
enterprise value is allocated to the various debt classes. Through
earnings growth, the expected recovery for bank debt holders has
increased to the 'RR1', (91%-100%) recovery band. Expected recovery
for the 7.75% senior subordinated notes remains within the 'RR5'
recovery band of 11%-30%. Acquired businesses have created Goodwill of
over $1.2 billion or about 60% of total assets and compares to just
$86 million of PP&E, $159 million of trademarks and trade names, and
$172 million of general intangibles as of first fiscal quarter
(1FQ)2008. The senior bank facilities are secured by a first priority
security interest in all assets including PP&E, inventories,
intellectual property and general intangibles. Although this indicates
somewhat weakened collateral support for the $780 million term loan,
Fitch believes the company's debt has ample cash flow support, and
that in a distressed scenario, the firm's going-concern value would
provide ample coverage, particularly given the essential and exclusive
nature of many of the company's products.
TDG continues to generate strong and growing operating EBITDA
margins, nearly 44% as of the first fiscal quarter of 2008 ended Dec.
29, 2007. The company has successfully executed its strategy of
integrating new businesses and growing margin in the process. TDG has
been able to maintain and expand margins due to several factors
including the company's position as a sole source provider for 75% of
sales in FY2007; high proportion of aftermarket sales (about 60% of
sales) which earn robust margins; high barriers to entry as the result
of certification costs; and the proprietary nature of roughly 90% of
the product offering. A dedicated focus on cost containment and
productivity improvements has also strengthened margins.
TDG had free cash flow (FCF) of just over $100 million in 2007.
Free cash generation is typically solid with FCF/Adjusted Debt in the
high single digit to low double digit percentage range. At fiscal year
ended Sep. 30, 2007 it was 7.4%. The business is not capital
intensive, which also helps support free cash generation. Capital
expenditures tend to be less than 2% of sales per year.
TDG had debt of $1,357.8 million compared to revenues of $633.2
million for the latest twelve months ended Dec. 29, 2007. Historical
leverage shows a pattern coinciding with the company's acquisition
strategy: leverage rises after an acquisition and then gradually moves
down as earnings increase; large debt repayments have not been typical
in the past several years. Most recently, leverage (calculated using
unadjusted EBITDA) moved from 4.7x at Dec. 31, 2006 to 6.3x at March
31, 2007 after the acquisition of ATI. The company acquired $422
million of new debt financing in 2007. Funds (along with cash on hand)
were used for several acquisitions, most notably ATI for $430 million.
Leverage moved to 5.8x and then 5.3x over the next two quarters (as of
Sept. 30, 2007). With the results of first fiscal quarter 2008, Fitch
calculates leverage of about 4.9x as of Dec. 29, 2007.
TDG has acquired 21 businesses since 1993, including four since
October 2006 (fiscal 2007). Management remains open to further
acquisitions and indicates there are a number of smaller deals under
review. The company believes there are several potential acquisitions
that would be accretive. Management has a solid record of integrating
acquisitions profitably. Nonetheless, the potential risks of
aggressive M&A (either in size or number of deals) as well as the
impact of previous acquisitions on balance sheet strength, acts as a
constraint on the ratings.
Liquidity as of Dec. 29, 2007, was about $369 million, consisting
of $170 million of cash and $199 million in revolving credit
availability. A strong 1FQ2008 provided operating cash generation of
about $60 million. The company has no debt maturities in fiscal 2008,
but may be required to make mandatory prepayments of up to 50% of
excess cash (depending on leverage ratio) on the senior secured credit
facility beginning in calendar 2009.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site. The issuer did not participate in the
rating process other than through the medium of its public disclosure.
Fitch Ratings
Shawn Paydar, 212-908-0815
Craig Fraser, 212-908-0310
Brian Bertsch, 212-908-0549 (Media Relations)
Copyright Business Wire 2008
