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S&P puts TransDigm on CreditWatch negative; Moody's lowers outlook

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S&P puts TransDigm on CreditWatch negative; Moody's lowers outlook

S&P Global Ratings placed all of TransDigm Group Inc.'s ratings on CreditWatch with negative implications after the aircraft parts maker said it will acquire rival Esterline Technologies Corp. for about $4 billion.

The rating agency said the planned acquisition could weaken TransDigm's credit metrics, pushing debt-to-EBITDA above the downgrade trigger in fiscal 2019 and close to it in 2020.

The improvement in TransDigm's competitive position as a result of the Esterline takeover may not be enough to offset the increase in debt, according to S&P.

"While Esterline brings additional scale and capabilities, it also has much lower profitability, has a lower proportion of aftermarket sales, and participates in more competitive markets than TransDigm," the debt watcher said.

S&P also said the Esterline deal may pose integration risk since it is TransDigm's biggest acquisition.

In addition, S&P cited TransDigm's "very aggressive" financial policy that is expected to continue following the deal, including large debt-financed acquisitions and dividends.

Meanwhile, Moody's affirmed TransDigm's B1 corporate family rating and Ba2 senior secured rating, but lowered the outlook to negative from stable.

Moody's warned that the size of the Esterline deal will result in a "period of elevated execution risk," and that the use of debt to partially fund the acquisition could increase financial risk.

Fitch Ratings also affirmed TransDigm's long-term issuer default ratings at B with a stable outlook, saying the Esterline acquisition will not trigger negative rating sensitivities or significantly change the company's overall credit profile.

"Fitch has some concerns regarding the valuation of the transaction and its integration, but these concerns are not significant enough to drive a rating change," the rating agency said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.