NEO Tech affirmed by S&P Global Ratings at CCC+ as demand improves

Natel Engineering Co. LLC, doing business as NEO Tech, was affirmed today by S&P Global Ratings, and its outlook was revised to stable from negative after weakening demand forced NEO to use equity cures to pass two quarterly net leverage covenants in fiscal 2021. The company's issue-level CCC+ rating on its term loan due 2026 (L+500, 1% Libor floor) was also affirmed.

S&P Global Ratings said the company, like other electronics manufacturing services, or EMS, providers, was facing "headwinds on demand from the COVID-19 pandemic." Ratings noted that although demand has recently improved, the global semiconductor supply chain shortage is negatively affecting many EMS businesses and hurting NEO's revenue, EBITDA and free operating cash flow.

The rating agency foresees semiconductor supply chain issues beginning to ease in fiscal 2023, but until then, Ratings projects EBITDA decreasing in fiscal 2022, pushing leverage into the low-9x area. An uptick in EBITDA in fiscal 2023 should reduce leverage into the high-6x range that year.

Ratings projects free operating cash flow will be "modestly negative" in fiscal 2022 but improve to positive free operating cash flow the following year. The agency believes that the company's nearly $75 million in total liquidity, as of the second quarter of fiscal 2022, is "less than adequate due to term loan covenant headroom so tight that coverage tests could be breached if forecast EBITDA were to decline by just 10%."

NEO Tech provides outsourced design, engineering, manufacturing and testing services for OEM manufacturers of high-reliability and mission-critical electronic and micro-electronic systems.