Fitch expects the issuance to be neutral to TDG's and TDI's long-term Issuer Default Ratings (IDRs) and the ratings of TDI's senior secured facilities. However, the up to
The Rating Outlook is Negative. While Fitch expects TDG's projected metrics will still be consistent with the current 'B' IDR, the level of support for this rating will be reduced by the new debt. Approximately
KEY RATING DRIVERS
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.
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.
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. Fitch calculates the expected recovery for bank-debt holders after giving effect to the anticipated debt issuances will remain 'RR1', indicating recovery of 91%-100%. While the expected recovery of senior subordinated notes are currently 'RR5' (recovery in the range of 11%-30%), Fitch calculates the recovery prospects for this class of securities may decline to 'RR6' (recovery in the range of 0% - 10%) following the anticipated issuance of the incremental indebtedness the majority of which is expected to be comprised of senior secured facilities.
The Negative Outlook is supported by significant leverage of the company and its 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 estimates TDG's leverage could increase to up to 7.4x following the completion of the debt offering, up from approximately 6.0x as of
In fiscal 2013, TDG generated approximately
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.
A negative rating action may be considered should the weakening of global economy or a downturn in Aerospace sector have a more significant impact on the company's earnings, margins 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
--Long-term 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'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
David Petu, CFA
Source: Fitch Ratings
Most Popular Stories
- Florida Warns Beach-goers About Flesh-eating Bacteria
- Sutherland Responds to 'Unprofessional' Jibe
- LivePro Is a Mobile Hot Spot, Projector in One
- Adrienne Bailon Disses Ex-Lover Rob Kardashian
- Business Leaders Set for CHCC Convention
- Islamic State Fights for Control of Syrian Oil Wealth
- How to Fit Green Energy Into Your Portfolio
- U.S. Economy Grows at Fastest Pace in 10 Years
- Is California Going to Land Tesla's Battery Plant?
- Sanctions Will Hit Russia Hard if Not Lifted Quickly