NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB/RR1' rating to TransDigm Inc.'s (TDI) recently funded $650 million senior secured term loan and to the $500 million delayed-draw term loan, the proceeds of which will be used to repurchase the already-tendered $500 million senior subordinated notes due 2021. In addition, Fitch has affirmed the Long-Term Issuer Default Ratings (IDR) of TransDigm Group, Inc. (NYSE:TDG) and its indirect subsidiary TDI at 'B'. The Rating Outlook is Stable. Fitch's ratings cover approximately $10.9 billion of outstanding debt after giving effect to the incremental $650 million of borrowings. A full list of rating actions follows at the end of this release.
The Recovery Ratings (RRs) 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. TDI's capital structure includes senior secured credit facilities and senior subordinated notes. The expected RR for the senior secured credit facilities is 'RR1', indicating recovery prospects in the range of 91% to 100%. The senior subordinated notes are at the 'RR5' level, which reflects an expected recovery in the 11%-30% range.
KEY RATING DRIVERS
On Oct. 14, 2016, TDG announced it received funding for the new $650 senior secured term loan, the proceeds of which will be used to partially fund a special $24 per share cash dividend. The new loan is incremental to the F term loan due June 2023. The amended term loan F also includes a new $500 million delayed-draw term loan, the proceeds of which will be used to repurchase the already-tendered $500 million senior subordinated notes due 2021. Fitch estimates the issuance will increase the company's current leverage (debt/EBITDA) level to 7.7x, up from the previously expected leverage of 7.3x.
Fitch expects leverage to decline to approximately 7.2x by the end of fiscal 2017 as a result of the company's recent acquisition-driven growth. Even though TDG's leverage metrics have stabilized, the company's coverage ratios have steadily deteriorated, as FFO interest coverage declined to 2.5x at the end of 2015 from 3.2x at the end of 2012. TDG's ratio of operating EBITDA-to-gross interest expense declined to 3x, down from 4x during the same period. Fitch anticipates a continued deterioration of coverage ratios due to the expected increase in indebtedness and corresponding rise of cash interest expenses.
The ratings are supported by the company's strong free cash flow (FCF), good liquidity, strong margins, healthy commercial aerospace markets, higher U.S. defense spending, and a favorable debt maturity schedule. TDG has good diversification in its portfolio of products that supports a variety of commercial and military platforms/programs, and it is a sole source provider for the majority of its sales.
Fitch's concerns include the company's high leverage, declining interest coverage, the long-term cash deployment strategy which focuses on acquisitions and occasional debt-funded special dividends, and weak collateral support for the secured bank facility in terms of asset coverage. Additionally, Fitch notes that TDG is exposed to the cyclicality of the aerospace industry, reporting several quarters of organic sales declines during fiscal 2009 and 2010 driven by lower demand for aftermarket parts and production cuts by commercial original equipment manufacturers (OEMs). The market cyclicality is somewhat mitigated by growth from acquisitions, high margins, and sales diversification.
TDG generates significant cash flows due to its ability to demand a premium for its products, partially driven by a large percentage of sales from a relatively stable and highly profitable aftermarket business; low research and development costs; and low capital expenditures. Additionally, TDG's cash flows benefit from the lack of material pension liabilities and no other post-employment benefit (OPEB) obligations.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for TDG include:
--Leverage will remain in the range of 7x to 7.7x over the rating horizon;
--The company will issue additional debt over the next three years, offsetting expected growth in EBITDA;
--Excess cash will be paid to shareholders in the form of special dividends if the company does not make acquisitions;
--Revenues will grow by approximately 17% in both fiscal 2016 and 2017. The growth will slow to low double-digits thereafter driven by acquisitions and anticipated growth of the aerospace and defense sector;
--Margins will remain in the range of 44% to 46% over the rating horizon;
--The company will maintain long-term cash balances in the range of $500 million to $700 million.
RATING SENSITIVITIES
Fitch does not anticipate positive rating actions in the near term given current credit metrics and the company's cash deployment strategies. Positive rating actions could be considered if the company modifies its cash deployment strategy and focuses on debt reduction.
A negative rating action may be considered if there is significant cash flow margin erosion without commensurate de-leveraging. Additionally, Fitch may consider a negative rating action should TDG's leverage (debt-to-EBITDA) and FFO adjusted leverage increase and remain between 8x to 8.25x and above 9.5x, respectively, driven by weakening of the global economy, a downturn in the aerospace sector, or by issuance of additional debt to fund special dividends or acquisitions.
LIQUIDITY
TDG has adequate financial flexibility and good liquidity supported by a $600 million revolving credit facility and a sizable cash balance, as the company typically holds above $500 million in cash. As of July 2, 2016, TDG held $1.66 billion in cash and equivalents. Fitch anticipates the company's liquidity will remain in the historical range of $1 billion to $1.5 billion following the payment of the $24 per share dividend and redemption of $500 million senior unsecured subordinated notes due in 2021.
The company has no significant debt maturities until 2020 when $500 million of senior subordinated notes become due and the $1.2 billion tranche C of its credit facility matures. Fitch anticipates the company will refinance the maturing debt and estimates TDG's liquidity will fluctuate between $1 billion to $1.5 billion over the next several years.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
--$650 million senior secured term loan at 'BB/RR1';
--Delayed draw $500 million senior secured term loan at 'BB/RR1'.
In addition, Fitch has affirmed the following ratings:
TransDigm Group, Inc.
--Long-Term IDR at 'B'.
TransDigm Inc.
--IDR at 'B';
--Senior secured revolving credit facility at 'BB/RR1';
--Existing senior secured term loans at 'BB/RR1';
--Senior subordinated notes at 'B-/RR5'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013254
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https://www.fitchratings.com/regulatory
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