Stable Revenues Support TransDigm LBO

The new $740 million debt package backing the leveraged buyout of TransDigm will significantly increase the company's leverage, but Moody's Investors Service expects stable and eventually improved revenues to support the company's ratings. The $440 million of bank debt and $300 million senior subordinated notes supporting Warburg Pincus' and TransDigm managements' acquisition of the company from Odyssey Investment Partners have been assigned B1 and B3 ratings, respectively. In addition to the debt financing, Warburg Pincus will provide a $532 million equity investment.

Leverage for the aerospace component manufacturer will substantially increase from 3.4 times to about 5.5 times upon completion of the acquisition. Post-transaction debt is estimated to increase 73% from $401 million to $695 million. But the ratings are sustained by the company's ability to historically achieve strong operating cash flows and margins during weak market conditions, Moody's states.

TransDigm has demonstrated the ability to reduce its debt in the past and should be able to do it again, noted David Berge, v.p. and senior analyst at Moody's. Since its leveraged acquisition of Champion Aviation Products in 2001, TransDigm paid down $20 million, or 5%, of its debt. Moreover, by maintaining EBITDA margins and growing sales, the company was able to reduce leverage from five times to 3.4 times after the transaction. Going forward, Moody's expects TransDigm to reduce leverage to less than five times by 2004. Other factors that support the credit are strong interest coverage and the positive business dynamics from the company's military segment, which brought in 26% of the company's revenues in 2002.

Berge did note, however, that the current negative outlook attached to the credit is a warning. The outlook demonstrates a concern that the company will not be able to reduce debt from cash flows in the near term due to unexpected reductions in sales levels or margins. While the credit is supported by essentially all the company's assets, Moody's believes that coverage is weak with $1.3 billion of TransDigm's $1.4 billion in assets coming from intangible assets and goodwill. Calls to TransDigm officials were not returned by press time.