The NORDAM Group LLC Downgraded To 'B' On Possible Coronavirus Ramifications; Outlook Stable

  • The NORDAM Group LLC's maintenance, repair, and overhaul (MRO) and business jet businesses will likely be hurt by the coronavirus pandemic, resulting in weaker credit metrics.
  • Therefore, we are lowering our issuer credit rating on NORDAM to 'B' from 'B+'.
  • At the same time, we are lowering our issue-level rating on the company's $250 million term loan B to 'B' from 'B+'. The recovery rating remains '3'.
  • The stable outlook reflects our expectation that NORDAM will adequately manage through the uncertainties and maintain debt to EBITDA below 5x.
TORONTO (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions listed above.
NORDAM's credit metrics will be weaker than we previously expected as a result of the coronavirus, although the magnitude and timing of the virus' impacts remain uncertain.   Lower aircraft utilization will likely result in lower aftermarket revenues and business jets are likely to see order deferrals and cancellations as the crisis continues. NORDAM's MRO business is almost half of its revenue, with about half of this segment consisting of commercial aerospace revenues. We expect the remainder of the MRO segment--cargo and military--to be more stable. Although the company's business jet exposure has gone down, it remains significant at about 30% of revenues. We now expect debt to EBITDA of 4.3x-4.7x in 2020, compared to our previous expectations of 2.8x-3.2x.
Our stable outlook on NORDAM reflects our view that, despite the company's material exposure to commercial aftermarket as well as business jets, we expect it to maintain debt to EBITDA below 5x and free operating cash flow to be almost breakeven.
We could lower the rating on NORDAM within the next 12 months if we expect debt to EBITDA to increase above 5x and free cash flow is significantly negative. This could occur due to the effects of the coronavirus on earnings and cash flow are greater than we expect. It could also result from the company pursuing debt-financed acquisitions or shareholder distributions, which we view as less likely.

Although unlikely, we could raise the rating on NORDAM within the next 12 months if debt to EBITDA remains below 4x, and free operating cash flow to debt approaches 5%. This could occur if there is a quicker-than-expected recovery in air traffic, which would improve aftermarket demand, or if the impact on the business jet market is not as severe as we anticipated. This could also occur if revenue and earnings growth in other parts of the business are stronger than we have forecasted.
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