Fitch has assigned TransDigm, Inc.'s (TDI) $500 million senior
subordinated notes due 2021 a final 'B-/RR5' rating with a Negative
Outlook. The final rating is the same as the expected rating assigned on
June 26 subject to final document review. Proceeds of $1.4 billion
incremental indebtedness from the issuance of the notes and from drawing
a $900 million incremental term loan were used to pay a $22 per share
one-time dividend and for general corporate purposes. Approximately $5.5
billion of outstanding debt is covered by Fitch's ratings. A complete
list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The Negative Rating Outlook 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' Issuer Default Rating, the
level of support for this rating will be reduced by the new debt.
Fitch's 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 has no 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; however, 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 free cash flow (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.
At June 26, 2013, Fitch estimates TDG's leverage could increase to
approximately 6.6x 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 historical 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 has no
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 of $22 per
share or approximately $1.1 billion. Correspondingly, Fitch expects
TDG's FCF to range from negative $1.4 billion to negative $1.5 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 half of fiscal 2013 totaling approximately $160 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), and 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 earnings
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 currently rates TransDigm Group Inc.'s (NYSE: TDG) and its
indirect subsidiary TDI as follows:
TDG:
--Long-term IDR 'B'.
TDI:
--IDR 'B';
--Senior secured revolving credit facility 'BB/RR1';
--Senior secured term loan 'BB/RR1';
--Senior subordinated notes 'B-/RR5'.
The Rating Outlook is 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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796783
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