*S&P Revises Outlook On DynCorp Intl To Neg; Affirms ‘B’ Rtg

30 Oct 2014 13:04 ET Press Release: S&P Revises Outlook On DynCorp Intl To Neg; Affirms ‘B’ Rtg

	

 
 
The following is a press release from Standard & Poor's: 
 
     -- McLean, Va.-based military contractor DynCorp International Inc. (DI) 
is seeking covenant relief from its lenders on its secured credit facility in 
exchange for a 20% pro rata reduction to its existing $181 million revolver. 
     -- As a result, we are affirming our 'B' corporate credit rating and 
revising the rating outlook to negative.

 
     -- We are also revising the recovery rating on the company's secured 
credit facility to '1' from '2' and raising the issue rating to 'BB-' from 
'B+'. 
     -- The negative outlook reflects the risk that DI's credit metrics could 
deteriorate further as a result of lower earnings, despite continued debt 
reduction, because the company continues to face difficult operating 
conditions. 
 
NEW YORK (Standard & Poor's) Oct. 30, 2014--Standard & Poor's Ratings Services 
today said it affirmed its 'B' corporate credit rating on U.S.-based military 
contractor DynCorp International Inc. (DI) and revised the rating outlook to 
negative from stable. 
 
At the same time, we revised the recovery rating on the company's secured debt 
to '1' from '2', indicating our expectation for very high recovery (90%-100%) 
in a simulated payment default scenario. As a result, we raised the 
issue-level rating on the debt to 'BB-' from 'B+'. 
 
The company's unsecured debt rating remains unchanged at 'CCC+', with a '6' 
recovery rating, indicating our expectation for negligible (0%-10%) recovery 
in a payment default. 
 
"The outlook revision reflects the potential that DI's credit metrics could 
worsen because of difficult operating conditions, including troop withdrawals 
in Afghanistan and increased price competition for new awards," said Standard 
& Poor's credit analyst Chris Mooney. 
 
We continue to expect DI to generate positive cash flow over the next two 
years, although less than we had previously expected, which the company will 
likely apply toward debt reduction, or possibly acquisitions. However, it is 
unclear whether this will be enough to offset the impact of lower earnings on 
key credit metrics. Our base case assumes that debt to EBITDA will be between 
6x and 7x in 2015, but we could lower the rating if this ratio rises above 7x 
for a sustained period. 
 
DI is seeking an amendment to its secured credit facility, which will loosen 
financial covenants through maturity in 2016, as anticipated. Without the 
amendment, the company would have likely been in violation of covenants at the 
end of the third quarter of 2014. The amendment also includes a provision for 
a one-time add-back of up to $35 million related to a contract. While this 
type of charge is unusual for DI, it does represent reduced prospects for 
future cash flow. In conjunction with the amendment, the revolver will shrink 
to about $145 million from $181 million. Still, we believe the company still 
has ample liquidity to handle operational and financial obligations over the 
next year. 
 
The negative rating outlook reflects uncertainty about future earnings and 
cash flow because of significant exposure to lower U.S. defense spending and 
shifting U.S. foreign policies, combined with increased competition for new 
awards. Still, our base case assumes that continued debt reduction will 
largely offset the impact of lower sales and earnings on key credit ratios, 
with debt to EBITDA remaining between 6x-7x in 2015. 
 
We could lower the rating if debt to EBITDA rises above 7x for a sustained 
period, which could be caused by greater-than-expected operating difficulties, 
including the loss of key contracts or lower margins, or debt reduction less 
than we expect. A deterioration in the company's liquidity profile, including 
covenant violations that cannot be cured, could also result in a downgrade. 
Although less likely, we could also lower the rating if the company's 
competitive position deteriorates, causing us to change our business risk 
assessment to "vulnerable." 
 
We could revise the outlook to stable if the percent of FFO to debt remains in 
the high single digits and debt to EBITDA remains below 6x for a sustained 
period, which could result from new contract awards and margin improvement. 
 
RELATED CRITERIA AND RESEARCH 
 
Related Criteria 
     -- Key Credit Factors For The Aerospace And Defense Industry, March 25, 
2014 
     -- Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 
     -- Corporate Methodology, Nov. 19, 2013 
     -- Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 
     -- Management And Governance Credit Factors For Corporate Entities And 
Insurers, Nov. 13, 2012 
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009 
 
Related Research 
     -- Defense Contractors Are Unlikely To Benefit From Expanded U.S. Efforts 
To Defeat ISIS, At Least For Now, Sept. 12, 2014 
     -- Industry Economic And Ratings Outlook: The Gap Between Global 
Aerospace Companies And Defense Contractors Narrows, May 15, 2014 
     -- Conditions Remain Trying For U.S. Government Service Contractors 
Despite A Short-Term Budget Deal, April 25, 2014 
     -- Defense Contractors See Few Surprises In The Fiscal 2015 U.S. Defense 
Budget And 2014 Quadrennial Review, March 10, 2014 
     -- Department Of Defense Budget For 2015 Calls For Smaller, Modernized 
Military, Feb. 24, 2014 
 
Complete ratings information is available to subscribers of RatingsDirect at 
www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by 
this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column. 
 
Primary Credit Analyst: Chris Mooney, CFA, New York (1) 212-438-4240; 
                        chris.mooney@standardandpoors.com 
Secondary Contact: Christopher A Denicolo, CFA, Washington D.C. (1) 212-438-1449; 
                   christopher.denicolo@standardandpoors.com 
 
 
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30 Oct 2014 13:04 ET Press Release: S&P Revises Outlook On DynCorp -2-

	

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(END) Dow Jones Newswires

October 30, 2014 13:04 ET (17:04 GMT)

Dow Jones & Company, Inc.

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