​Moody’s more optimistic on Constellis credit rating post-Centerra acquisition

New York credit analyst firm Moody’s Investors Service Inc. is more optimistic about Constellis Holdings LLC following an announcement earlier this month that the Reston-based security contractor was going to purchase Centerra Group LLC.

In a Thursday report, Moody’s upgraded Constellis’ ratings outlook from “stable” to “positive” — reflecting more confidence in the company’s ability to pay its bills.

Part of that momentum comes from the Centerra purchase, which “will expand contract diversity and revenue scale” that could help make the company more profitable, Moody’s writes.

Prior to the acquisition, Constellis generated just under $1 billion in annual revenue and had 8,000 employees. With Centerra, that will expand to $1.5 billion and 17,000 employees.

As I wrote earlier this month, with the acquisition, Constellis is growing its security work in the U.S. — where it is currently concentrated internationally.

“Centerra’s base operations and facilities management expertise should complement Constellis’ capabilities, broadening the range of contract vehicles it can pursue,” Moody’s wrote.

But even outside of Centerra, Moody’s is encouraged by an “improving U.S. government budgetary setting” — no doubt bolstered by President Donald Trump’s calls to significantly increase defense spending— as well as a “favorable demand environment for diplomatic and commercial-end market protective services.”

“The range of facilities and projects requiring protective services — and the extent of services provided under existing contracts — tends to increase during environments requiring increased political intervention to drive stabilization, such as many parts of the world are presently experiencing,” Moody’s writes, pointing to Constellis’ presence in the Middle East and Africa.

Moody’s holds a “B3″ rating on the company, which puts in firmly in the “speculative grade” or “junk bond” territory, an indication that Constellis’ bonds are still a relatively risky investment compared to more stable corporate bonds.

Moody’s also scored several tranches of Constellis debt that is set to mount with the acquisition.

Constellis is proposing to take out a $75 million credit line and a $725 million loan from banks. This comprises first lien debt, meaning in the event of bankruptcy, these creditors would have first dibs on Constellis’ assets. Moody’s gave this debt a “B2” rating, which is a notch above its overall corporate rating but still a junk bond rating.

Constellis plans to take out $215 million more in a second lien bank loan. Moody’s gave this debt a “Caa2” — two rating categories below the corporate “B3” rating. This new debt will be used to refinance $450 million in existing debt due in 2020 and provide $175 million in funds toward the Centerra purchase. Terms of that deal have not been disclosed.

James Bach covers federal contracting.

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