ADS Tactical Inc. Ratings Raised To 'B+' From 'B' On Stronger Revenue And Improved Credit Metrics; Outlook Stable


  • ADS Tactical Inc.'s credit ratios have improved beyond our initial forecasts, and we expect additional improvement as the company continues to grow its revenue and benefit from increases in the U.S. defense budget.
  • Therefore, we are raising our issuer credit rating on ADS to 'B+' from 'B'.
  • We are also raising the issue-level rating on the company's senior secured notes to 'B+' from 'B'. The recovery rating remains unchanged at '4', indicating our expectation of average recovery (30%-50%, rounded estimate: 35%) in a payment default.
  • The stable outlook reflects our expectation that credit ratios will continue to improve due to higher revenues and stable margins, even with working capital investments to support that growth.
TORONTO (S&P Global Ratings) April 15, 2019—S&P Global Ratings Today took the 
above listed rating actions. The rating action reflects the recent improvement 
in credit ratios at ADS and our expectation that those ratios are likely to 
improve over the next few years as revenues grow, margins stay flat, and debt 
levels decline. We expect that free cash flow (including tax distributions to 
owners) will be flat in 2019, then begin to improve thereafter. In 2019, we 
expect debt to EBITDA to decline to 2.8x-3.2x and operating cash flow (OCF) to 
debt to improve to 8%-12%.  


The stable outlook reflects our expectations that ADS is likely to see 
significant near-term revenue growth, with margins flat as product mix shifts 
to less profitable segments offsets the benefits of operating leverage. 
Although higher sales will require investments in working capital, we expect 
credit metrics to improve over the next 12 months, with debt to EBITDA of 
2.8x-3.2x and OCF to debt of 8%-12%.


Although unlikely in the next 12 months, we could lower the rating if OCF to 
debt remains well below 10% and debt to EBITDA exceeds 4x for a sustained 
period. This could occur if working capital needs are higher than we expect or 
earnings deteriorate due to increasing costs. Although less likely, it could 
occur if the company increase debt to fund substantial discretionary 
shareholder distributions.


We could raise our ratings over the next 12 months if OCF to debt exceeds 15% 
and debt to EBITDA falls to less than 3x for a sustained period. This could 
occur if the company is able to reduce the working capital investment needed 
to support sales growth and uses this extra cash flow to reduce debt. In 
addition, management would have to limit discretionary dividends to its 
shareholders and commit to maintain credit ratios at or better than these 
levels.
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