Fitch Ratings has affirmed TransDigm Group Inc.'s (NYSE: TDG) and its
indirect subsidiary TransDigm, Inc.'s (TDI) Issuer Default Ratings at
'B'. Fitch has also affirmed ratings for TDI's term loan and senior
secured credit facility at 'BB/RR1' (after giving effect to a proposed
$700 million increase to the facility in form of an additional term
loan) and the ratings for TDI's outstanding senior subordinated notes at
'B-/RR5'.
Fitch expects to rate TransDigm, Inc.'s (TDI) proposed $500 million
senior subordinated notes 'B-/RR5' (subject to document review).
Fitch has revised the Rating Outlook to Negative from Stable.
Proceeds from the issuance of the $1.2 billion incremental indebtedness
are expected to be used to pay a one-time dividend in the range of $1
billion to $1.8 billion. Approximately $5.5 billion of outstanding debt
is covered by Fitch's ratings after giving effect to the new debt
issuance. A complete list of ratings is provided at the end of this
release.
KEY RATING DRIVERS
The revision of the Outlook to Negative from Stable is driven by a
significant increase in leverage because of the one-time dividend,
resulting in a diminished ability to de-lever rapidly. This
correspondingly impacts TDG's financial flexibility to pursue large
scale debt-funded acquisitions at the current ratings. Fitch believes
TDG has the capacity to make approximately $400 million of acquisitions
per annum beginning fiscal 2014 with internally generated cash; however,
a larger acquisition would likely require debt financing. While Fitch
expects TDG's projected metrics will still be consistent with the 'B'
IDR, the level of support for this rating will be reduced by the new
debt.
The ratings reflect the company's strong free cash flow (FCF; cash from
operations less capital expenditures and dividends), good liquidity, and
financial flexibility which includes a favorable debt maturity schedule.
TDG benefits from high profit margins and low capital expenditures,
diversification of its portfolio of products which support a variety of
commercial and military platforms/programs, a large percentage of sales
from a relatively stable aftermarket business, its role as a sole source
provider for the majority of its sales, and management's history of
successful acquisitions and subsequent integration. Fitch also notes
that TDG does not have material pension liabilities and has no other
post-employment benefit (OPEB) obligations.
Fitch's concerns include the company's high leverage, its long-term cash
deployment strategy which focuses on acquisitions, and weak collateral
support for the secured bank facility in terms of asset coverage.
Additionally, Fitch is concerned with the risks to core defense
spending, but this risk is mitigated by TDG's relatively low exposure to
the defense budget and by a highly diversified and program-agnostic
product portfolio.
Fitch notes that TDG is exposed to the cyclicality of the aerospace
industry, as it reported several quarters of organic sales declines
during fiscal 2009 and 2010 driven by lower demand for aftermarket parts
and by production cuts by commercial original equipment manufacturers
(OEMs). While market cyclicality is somewhat mitigated by growth from
acquisitions, high margins and sales diversification to the defense
sector, the expected decline in defense spending coupled with a possible
downturn may result in lower FCF.
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. The expected recovery
for bank-debt holders remains 'RR1', indicating recovery of 91% - 100%.
The senior subordinated notes are 'RR5' which reflects an expectation of
recovery in the 11% - 30% range.
Fitch estimates TDG's leverage could increase to approximately 6.6 times
(x) on June 26, 2013 following the completion of the debt offering, up
from approximately 5.2x as of March 30, 2013. The increased leverage is
in line with the company's historic leverage which typically fluctuates
between approximately 4.5x and 6.0x, occasionally reaching higher than
7.0x. At the end of fiscal 2012, TDG's leverage was approximately 4.6x,
down from 5.6x at the end of fiscal 2011. TDG's leverage is somewhat
high for the rating; however, it is mitigated by strong margins and
positive FCF generation. Over the next several years, Fitch projects
TDG's leverage to be at the higher end of the historical range of 4.5x
to 6.0x.
At March 30, 2013, TDG's liquidity consisted of $680 million in cash and
$303 million of availability under its revolver ($310 million less $6.7
million in letters of credit), partially offset by $22 million in
current amortization payments under the $2 billion term loan. TDG does
not have major maturities until 2017. Fitch expects TDG to maintain a
solid liquidity position in fiscal 2013 and 2014.
In the fiscal year ended Sept. 30, 2012, TDG generated approximately
$385 million FCF. Fitch expects TGD's FCF to be negative in fiscal 2013
driven by special dividends of $660 million paid during the first
quarter of fiscal 2013 and the recently announced dividend in the range
of $1 billion to $1.8 billion. Correspondingly, Fitch expects TDG's FCF
to range from negative $1.3 billion to negative $2.1 billion. Excluding
special dividends, TDG generates solid positive FCF, aided by typically
low capital spending and high margins. Capital expenditures tend to be
less than 2% of sales per year.
Excluding special dividends, Fitch expects TDG to generate more than
$350 million of FCF in fiscal 2013. Projected future cash flows should
be sufficient to fund day-to-day operations while allowing the company
the flexibility to pursue modest future acquisitions.
In addition to special dividends, acquisitions are the main focus of
TDG's cash deployment strategy. In fiscal 2012, TDG made three
acquisitions totaling $868 million compared to $1.7 billion spent on
acquisitions in 2011. TDG completed two additional acquisitions in the
first fiscal half of 2013 totaling approximately $325 million. Fitch
expects TDG will continue to focus its cash deployment on acquisitions,
or special dividends if the company does not find suitable acquisition
targets.
TDG is exposed to three business sectors: commercial airplane original
equipment (OE), commercial aftermarket and defense (both original
equipment and aftermarket). TDG's sales growth rates during the latest
economic downturn were primarily driven by the acquisitions and the
stability of defense spending which significantly moderated year over
year organic sales declines in commercial OE and aftermarket sales.
Fitch considers the conditions within the industry to be supportive of
the rating.
Rating Sensitivities:
A negative rating action may be considered should the company make a
large debt funded acquisition or additional special dividend which will
result in increased leverage; if the global economy weakens; or defense
spending cuts have a more significant impact on the company's earning
and FCF than currently anticipated. A positive rating action is not
likely in the intermediate term, but Fitch may consider a positive
rating action if the company maintains its leverage level within the
range of 4.5x to 5.6x along with its strong revenue growth and high cash
generation.
Fitch has assigned 'B-/RR5' ratings to the expected issuance of $500
million senior subordinated notes and has affirmed the following ratings:
TDG:
--Long-term IDR at 'B'.
TDI:
--IDR at 'B';
--Senior secured revolving credit facility at 'BB/RR1';
--Senior secured term loan at 'BB/RR1';
--Senior subordinated notes at 'B-/RR5'.
The Rating Outlook is revised to Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Aerospace and Defense Companies: Sector Credit Factors', Aug.
9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Rating Aerospace and Defence Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682318
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794704
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