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