Fitch Downgrades Transdigm's Senior Subordinated Debt to 'CCC+/RR6'

NEW YORK--()--Fitch Ratings has affirmed the Issuer Default Rating of TransDigm Group, Inc. (NYSE:TDG) and its indirect subsidiary TransDigm Inc. (TDI) at 'B' following the issuance of approximately $3.4 billion in debt. Fitch has also affirmed the ratings for TDI's senior secured credit facilities at 'BB/RR1' and has downgraded the rating of TDI's senior subordinated notes to 'CCC+/RR6' from 'B-/RR5'. The Rating Outlook is Negative. A complete list of rating actions is provided at the end of this release.

The newly issued debt consists of an $825 million tranche of term loans under TDI's senior secured credit facilities, the proceeds of borrowings under the $200 million trade receivables securitization facility, and $2.35 billion aggregate principal amount of senior subordinated notes maturing in 2022 and 2024. The proceeds will be used primarily to repurchase any or all of the outstanding $1.6 billion senior subordinated notes due in 2018 and to fund a cash dividend in the range of $900 million to $1.7 billion.

While Fitch expects TDG's projected metrics will still be consistent with the current 'B' IDR, the level of support for this rating is reduced by the new debt. Approximately $7.5 billion of outstanding debt is covered by Fitch's ratings after giving effect to the new debt issuance and the planned debt redemption.

KEY RATING DRIVERS

The one-notch downgrade of TDI's senior subordinated notes is driven by Fitch's expectations of lower recovery prospects for this class of the securities in a theoretical financial distress scenario. The recovery prospects of the senior subordinated notes are negatively affected by a significant increase in TDI's term loan borrowings under the senior secured credit facilities and an increase in the size of the senior secured revolving facility.

Additionally, Fitch notes TDG's diminished ability to de-lever rapidly due to sizable debt-funded special dividends issued over the past two years, with a negative impact on Fitch's long-term view of the recovery prospects. Fitch estimates the Recovery Rating for the senior subordinated notes is 'RR6' (recovery in the range of 0%-10%), down from the 'RR5' rating (recovery in the range of 11%-30%).

Fitch's ratings for TDG 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 that 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. TDG also has no material pension liabilities and has no other post-employment benefit (OPEB) obligations.

The Negative Outlook is supported by the company's significant leverage and its diminished ability to de-lever rapidly. This correspondingly affects TDG's financial flexibility to pursue large-scale debt-funded acquisitions at the current ratings.

Fitch estimates TDG's leverage could increase to up to 7.8x following the completion of the announced debt actions, up from approximately 6.0x as of March 29, 2014. The company's new leverage will be above the historical leverage range of 4.5x-6.5x. At the end of the fiscal year ended Sept. 30, 2013, TDG's leverage was approximately 6.6x, up from 4.6x at the end of fiscal 2012. TDG's leverage is somewhat high for the rating; however, it is mitigated by strong margins and positive FCF generation.

RATING SENSITIVITIES

Fitch may consider a negative rating action if TDG's leverage and FFO-adjusted leverage increase to above 8.0x-8.5x and 9.5x, respectively, as the result of an acquisition or a special dividend funded by additional debt. A positive rating action is not likely in the intermediate term. 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 strong revenue growth and high cash generation.

Fitch takes the following rating actions:

TDG

--Long-term IDR affirmed at 'B'.

TDI

-- IDR affirmed at 'B';

-- Senior secured revolving credit facility affirmed at 'BB/RR1';

-- Senior secured term loans affirmed at 'BB/RR1';

-- Senior subordinated notes downgraded to 'CCC+/RR6' from 'B-/RR5'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832052

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA
Director
+1-212-908-0280
david.petu@fitchratings.com
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
craig.fraser@fitchratings.com
or
Committee Chairperson
Michael Simonton
Managing Director
+1-312-368-3138
michael.simonton@fitchratings.com
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
David Petu, CFA
Director
+1-212-908-0280
david.petu@fitchratings.com
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
craig.fraser@fitchratings.com
or
Committee Chairperson
Michael Simonton
Managing Director
+1-312-368-3138
michael.simonton@fitchratings.com
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com