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Rating Action: Moody's assigns B3 ratings to TransDigm's new senior subordinated notes; B1 CFR unchanged
Global Credit Research - 14 Jan 2021
New York, January 14, 2021 -- Moody's Investors Service ("Moody's") assigned B3 ratings to TransDigm Inc.'s new senior subordinated notes. All other ratings, including the B1 Corporate Family Rating (CFR) and the B1-PD Probability of Default Rating, are unchanged. Proceeds from the new notes will be used to refinance the existing $1.2 billion senior subordinated notes due 2024. Ratings on the existing notes due 2024 will be withdrawn upon close. The ratings outlook remains negative.
The B1 corporate family rating balances TransDigm's aggressive financial policy defined by its sustained high funded debt and financial leverage and recurring substantial distributions to shareholders, against its strong business profile. TransDigm garners very strong margins from its sole-source provider position across a majority of its products as well as its proprietary designs reflected in its significant patent portfolio. The ratings anticipate that the amount of distributions to shareholders will be tempered, particularly in the near-term, while the coronavirus continues to weigh on demand from the company's commercial aerospace customers.
In the aftermath of the coronavirus, Moody's anticipates a pronounced downturn in commercial aerospace markets that is likely to be measured in years. Revenue pressures are expected to be particularly weighted towards commercial aerospace aftermarkets, which have historically been a key driver of TransDigm's earnings. This will result in an across-the-board weakening of credit metrics with diminished free cash flow, albeit still comfortably positive, and Moody's adjusted debt-to-EBITDA anticipated to be at or above 10x over the next 18 to 24 months.
Moody's recognizes TransDigm's robust business model as evidenced by industry leading margins that are anticipated to remain near or above 40% through a combination of cost-cutting measures and a strong operating strategy involving price increases and the development of profitable new products. Moody's also considers that the propriety and sole-source nature of the majority of the company's products will support the continued growth of TransDigm over the intermediate term. Furthermore, notwithstanding considerable earnings headwinds, Moody's expects TransDigm to maintain very good liquidity and sufficient financial flexibility, with significant cash balances, continued free cash generation and near-full availability under the revolving credit facility.
The Ba3 ratings for TransDigm's senior secured term debt and senior secured bonds are one notch above the CFR, reflecting their seniority and first lien security interest in substantially all assets of the company on an aggregate basis. The B3 rating for the company's senior subordinated notes is two notches below the CFR and reflects the subordination of this debt relative to the aforementioned first lien debt. Both the bank credit facilities and the subordinated notes are guaranteed by all of TransDigm's existing and future domestic subsidiaries, as well as the company's holding company parent TransDigm Group Incorporated (TDG).
The negative outlook reflects the potential for the impacts of the coronavirus on Transdigm's aerospace customer base to further constrain demand for its products, which would lead to sustained pressure on revenues, earnings and cash flow generation with a corresponding weakening of credit metrics and increasing financial leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to a downgrade include a deterioration of TransDigm's liquidity, such as a decline in cash balances over the near-term, expectations of negative free cash flow, or a greater reliance on the revolving credit facility. Any dividend distributions made to shareholders in the near-term or made prior to a more stable operating environment in commercial aerospace markets could also lead to a downgrade. A meaningful diminishment of interest coverage metrics or expectations of EBITDA margins sustained towards 35% could also result in downward ratings pressure. An inability to continue to make regular price increases, expectations of pricing pressure or a weakening of demand in military end markets could also result in a downgrade.
Factors that could lead to an upgrade include debt-to-EBITDA sustained below 5x on a Moody's-adjusted basis, coupled with maintenance of the company's industry leading margins and continuation of a strong liquidity profile.
The following ratings were assigned:
Issuer: TransDigm, Inc.
Senior Subordinated Regular Bond/Debenture, Assigned B3 (LGD5)
TransDigm Inc., headquartered in Cleveland, Ohio, is a manufacturer of engineered aerospace components for commercial airlines, aircraft maintenance facilities, original equipment manufacturers and various agencies of the US Government. TransDigm Inc. is the wholly-owned subsidiary of TransDigm Group Incorporated (TDG). Revenues for the last twelve-month period ending September 30, 2020 were approximately $5.1 billion.
The principal methodology used in this rating was Aerospace and Defense Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1224306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Eoin Roche VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Russell Solomon Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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