Press Release: S&PGR Revises Kratos Otlk To Pos From Neg; Snr Secd Rtg Raised
5:34 pm ET March 3, 2017 (Dow Jones) Print
The following is a press release from Standard & Poor's:
-- Kratos Defense & Security Solutions Inc. is using the proceeds from a
recent stock sale to pay down its debt, which--in combination with its
increasing earnings--will likely improve the company's credit measures over
the next 12 months.
-- Therefore, we are revising our outlook on the defense contractor to
positive from negative and are affirming our 'B-' corporate credit rating.
-- At the same time, we are raising our issue-level rating on the
company's senior secured notes to 'B-' from 'CCC+' and are revising our
recovery rating on the notes to '4' from '5'.
-- The positive outlook reflects our expectation that Kratos' credit
ratios will likely improve over the next year due to its lower debt levels and
increasing earnings, which could lead us to upgrade the company.
NEW YORK (S&P Global Ratings) March 3, 2017--S&P Global Ratings said today
that it has revised its outlook on U.S.-based Kratos Defense & Security
Solutions Inc. to positive from negative and affirmed its 'B-' corporate
credit rating on the company.
At the same time, we raised our issue-level rating on the company's senior
secured notes to 'B-' from 'CCC+' and revised our recovery rating on the notes
to '4' from '5'. The '4' recovery rating indicates our expectation for average
recovery (30%-50%; rounded estimate: 30%) in a default scenario.
"The outlook revision reflects our expectation that Kratos' credit ratios will
improve over the next year due to its lower debt levels and increasing
earnings, although there is some uncertainty in our forecast due to possible
program delays," said S&P Global credit analyst Isha Bagga. The company
recently sold up to $80 million of its common stock (if the overallotment
option is exercised) and plans to use most of the proceeds from the sale to
reduce its debt. This follows the company's sale of $76 million of its stock
late last year, the proceeds of which it used to reduce its debt and provide
liquidity to support its new programs. Kratos' earnings growth will be driven
by the likely start of deliveries for two major unmanned aerial target drone
programs later this year, as well as moderate revenue growth in the company's
satellite communications, training, microwave products, and public security
businesses. These factors should cause the company's debt-to-EBITDA to
decrease below 6.5x in 2017, which is down from over 15x as of last year.
Kratos' 2016 results were worse than we had expected due to a $18.7 million
loss accrual associated with the Low-Cost Attritable Unmanned Aerial System
(UAS) Strike Demonstration (LCASD) program, though we do not expect this to be
repeated.
The positive outlook on Kratos reflects that the company's likely debt
reduction, combined with our expectation for improving earnings from its
unmanned systems segment, should improve its credit metrics over the next 12
months. Specifically, the reduction of the company's debt and the increase in
its earnings should cause its FFO-to-debt ratio to approach 10% and its
debt-to-EBITDA to fall below 6.5x in 2017, although there is some uncertainty
in our forecast due to the possibility of program delays.
We could raise our rating on Kratos if the company's FFO-to-debt ratio
increases above 10% and its debt-to-EBITDA falls below 6.5x for a sustained
period. This would likely be caused by increased earnings from the ramp-up of
its new programs and the reduction of its debt using the proceeds from the
recent stock sale.
We could revise our outlook on Kratos to stable if its debt-to-EBITDA remains
above 7x and its FFO-to-debt ratio stays below the mid-single digit percent
area as of the end of 2017. This would likely occur if order delays, a
higher-than-expected level of investment in its unmanned systems programs, or
other operational problems prevent the company's earnings from improving as we
expect (or cause them to decline).
This post is as I believe it, as I remember it and, as always, just my opinion !!
