Rating Action: Moody's affirms TransDigm's B1 CFR and all other ratings; outlook to stable from negativeGlobal Credit Research - 21 Jan 2022New York, January 21, 2022 -- Moody's Investors Service ("Moody's") affirmed its ratings for TransDigm Inc. ("TransDigm"), including the company's B1 corporate family rating (CFR) and B1-PD probability of default rating. Concurrently, Moody's affirmed the Ba3 ratings for the senior secured bank credit facilities and senior secured notes and also affirmed the B3 ratings for the senior subordinated notes. The company's SGL-1 speculative grade liquidity rating remains unchanged. Moody's also changed the ratings outlook to stable from negative.The ratings affirmation and change in outlook to stable reflects Moody's increasing conviction of TransDigm's ability to grow earnings and strengthen its credit metrics over the next few years. The outlook is underpinned by Moody's expectation for a gradual increase in demand in commercial aerospace original equipment markets, as well as a continued recovery in highly profitable commercial aftermarkets, through 2022 and 2023. This will result in a steady, albeit gradual, reduction in TransDigm's high financial leverage.Today's rating actions are also supported by the company's track record of generating strong and consistent free cash flow despite the significant business headwinds the company has faced over the last 18 months. In addition, the company has very good liquidity with $4.8 billion of cash as of September 30, 2021.The following is a summary of today's rating actions:Issuer: TransDigm Inc.Corporate Family Rating, affirmed at B1Probability of Default Rating, affirmed at B1-PDSenior Secured Bank Credit Facility, affirmed Ba3 (LGD3)Senior Secured Regular Bond/Debenture, affirmed Ba3 (LGD3)Senior Subordinated Regular Bond/Debenture, affirmed B3 (LGD5)Outlook, changed to stable from negativeIssuer: TransDigm Holdings UK plcSenior Subordinated Regular Bond/Debenture, affirmed B3 (LGD5)Outlook, changed to stable from negativeRATINGS RATIONALEThe B1 CFR balances TransDigm's aggressive financial policy defined by its sustained high funded debt and financial leverage and recurring substantial distributions to shareholders, against its strong business profile. TransDigm garners very strong margins from its sole source provider position across a majority of its products as well as its proprietary designs reflected in its significant patent portfolio.TransDigm's debt-to-EBITDA of 9.5x as of September 2021 is very high and is an outlier for the B1 rating. That said, Moody's recognizes the uniqueness of TransDigm's business model that has enabled the company to maintain its industry leading margins and healthy cash generation, despite sustained earnings pressures. Over the last two years, TransDigm's EBITDA margins have remained comfortably in excess of 40%. These high margins, coupled with a flexible cost structure, allowed TransDigm to generate strong cash flow through the commercial aerospace downturn, with cumulative free cash flow of almost $2 billion in fiscal 2020 and 2021 (ended September).Moody's believes demand in commercial aerospace markets troughed several quarters ago and now expects a sustained, albeit measured, recovery. This will support a gradual reduction in leverage and Moody's expects TransDigm's debt-to-EBITDA to revert to historical levels (around 7x) by late fiscal 2023/early fiscal 2024. Furthermore, Moody's believes it probable that at least a portion of TransDigm's very sizable cash balances (currently $4.8 billion) will be deployed to fund acquisitions over the next 12 to 18 months. Moody's expects any such acquisitions to be largely financed with cash and this will serve to accelerate TransDigm's deleveraging trajectory. However, Moody's also recognizes that in the absence of M&A opportunities, there will be a growing likelihood of TransDigm undertaking a special shareholder dividend over time.The SGL-1 speculative grade liquidity rating denotes Moody's expectations of very good liquidity over the next 12 months. Moody's expects TransDigm to maintain healthy cash balances over the next 12-18 months. At September 2021 cash balances were $4.8 billion, although Moody's expects this amount to decline over time, as the company pursues acquisitions, and potentially shareholder distributions. Moody's expects TransDigm to generate around $1 billion in free cash flow during fiscal 2022 or 5% FCF-to-debt. External liquidity is provided by a $810 million revolving credit facility that expires in 2026 (currently undrawn). Moody's anticipates that the company will renew its accounts receivables securitization facility ($350 million, fully utilized) before it expires in July 2022.The Ba3 ratings for TransDigm's senior secured term debt and senior secured bonds are one notch above the CFR, reflecting their seniority and first lien security interest in substantially all assets of the company. The B3 rating for the company's senior subordinated notes is two notches below the CFR and reflects the subordination of this debt relative to the aforementioned first lien debt. Both the bank credit facilities and the subordinated notes are guaranteed by all of TransDigm's existing and future domestic subsidiaries, as well as the company's holding company parent TransDigm Group Incorporated (TDG).FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to a downgrade include a deterioration of TransDigm's liquidity, any dividend distribution that is leveraging in nature or comes before the business has substantially recovered, or a meaningful diminishment of interest coverage metrics or EBITDA margins.Factors that could lead to an upgrade include debt-to-EBITDA sustained below 5.5x on a Moody's-adjusted basis, coupled with maintenance of the company's industry leading margins and continuation of strong liquidity.TransDigm Inc., headquartered in Cleveland, Ohio, is a manufacturer of engineered aerospace components for commercial airlines, aircraft maintenance facilities, original equipment manufacturers and various agencies of the US Government. TransDigm Inc. is the wholly-owned subsidiary of TransDigm Group Incorporated (TDG). Revenues for the twelve-month period ended September 30, 2021 were $4.8 billion.The principal methodology used in these ratings was Aerospace and Defense published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287887. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Eoin Roche VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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