Aviation & Aerospace Co. Adds Senior Leverage

Vertex Aerospace, an aviation and aerospace technical services company formerly known as Raytheon Aerospace, has added a $43 million piece to its existing senior secured credit facility, increasing senior leverage from 3.5 times to a pro forma 4.2 times, noted Moody's Investors Service. The new loan joins a credit facility comprising a $40 million revolver, a $38 million "A" piece and a $104 million "B" tranche. The add-on was assigned the same rating as the existing bank debt, which carries a B1 rating. The loan, which was two times oversubscribed, was allocated last week and priced at LIBOR plus 4%, according to a banker.

Vertex's ratings are supported by the favorable operating environment for the defense sector and Moody's expects the company to continue to improve its operating margins. Vertex's funded backlog status has increased from $238.5 million at year-end 2001 to $328 million at the end of 2002. "They have been able to successfully increase the visibility in terms of revenue stream," said David Berge, Moody's v.p. and senior analyst. In addition, the acquisition of Flight International has been apparently successful. The company has been able to meet its goals and in some cases actually do better than the goals it outlined before the acquisition, Berge explained.

Proceeds from the add-on will be used to repay the $53 million of principal amount of 103/4% PIK notes held by Raytheon Corp. as seller financing in the original sale of Raytheon Aerospace to Veritas Capital in 2001. The company was able to pay down the notes for $40 million, a discount from their book value.

The rating assigned to the new loan reflects not only Vertex's highly levered capitalization, but also the weak coverage provided by the company's balance sheet. According to Moody's, an asset base securing the $265 million of senior debt, comprising roughly $229 million of tangible assets and $142 million of intangible assets, does not provide "robust" collateral coverage. Cash-flow generation will increase in the medium term but, Moody's does not expect the free cash flow to exceed 10% of total debt until after 2004. Calls to James Van Dusen, Vertex's cfo, were not returned by press time.