Moody's Downgrades Erickson (EAC) Ratings Two-Notches to 'Caa3'; Outlook Remains Negative
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Moody's Investors Service, ("Moody's") downgraded the ratings assigned to Erickson Incorporated (Nasdaq: EAC): Corporate Family to Caa3 from Caa1, Probability of Default to Caa3-PD from Caa1-PD and Senior Secured Second Lien Notes to Ca from Caa2. Concurrently, Moody's affirmed the Speculative Grade Liquidity rating at SGL-4 (weak). The ratings outlook remains negative.
Moody's has taken the following actions:
Issuer -- Erickson Incorporated:
Corporate Family Rating, downgraded to Caa3 from Caa1;
Probability of Default Rating, downgraded to Caa3-PD from Caa1-PD;
Senior Secured Second Lien Notes due 2020, downgraded to Ca (LGD4) from Caa2 (LGD4);
Speculative Grade Liquidity rating, affirmed at SGL-4.
The ratings outlook is negative.
The downgrade of the Corporate Family Rating (CFR) to Caa3 reflects additional pressure on Erickson's already weak liquidity position, driven by a continued decline in revenues and earnings that have led to sustained negative free cash flow, in the face of weak end-market demand and a capital structure that Moody's views as untenable. The company relies heavily on its revolving credit facility, which has limited borrowing availability and Moody's anticipates that if the fixed charge coverage covenant were to be tested in the near term, the company would breach it. Liquidity is further constrained by a requirement (under a recent revolver amendment) for the company to refinance the facility or incur significant fees. Although Erickson has won and extended some contracts, it is has had limited success in replacing the value of lost or ending contracts with the US Forestry Services (USFS) and the US Department of Defense organizations (DoD), and in expanding the commercial customer base to diversify from its pure legacy air-crane and heavy lift operations. Moody's anticipates the difficult operating environment will continue for some time. The aforementioned factors make the company susceptible to a liquidity crunch and increase the likelihood that it will seek to restructure its debt to achieve a more tenable capital structure.
The Caa3 Corporate Family rating reflects Erickson's weak liquidity and Moody's expectation of continued weakness in the company's credit metrics, albeit with the potential for marginal strengthening in 2017, supported by cost management and some revenue enhancement from recent contract wins. The rating also considers the execution risk in the company's ongoing turnaround strategy, which relies on the ability of the relatively new management team to extract growth from new markets and customers amidst sluggish global economic growth that pressures government budgets, and the competitive response of incumbents in those markets. Over half of Erickson's aircraft, mostly helicopters, are currently operable but not in revenue service. Moody's believes that finding sustained work for the available aircraft will be challenging, particularly as most contracts are competitively bid by multiple service providers. The cyclical nature of demand across Erickson's core air-crane service lines, including fire-fighting, logging and infrastructure construction also contribute to the risk profile. Moody's believes the company will remain focused on managing costs towards achieving at least breakeven free cash flow in the intermediate term.
The SGL-4 rating reflects Erickson's weak liquidity profile, heightened by the limited ability of internally generated cash to meet debt service requirements and tight covenant and revolver availability.
The two-notch downgrade in the rating assigned to the second lien notes reflects the higher priority of claim of the asset-based revolver in the liability structure.
The negative outlook reflects Moody's expectation of continuing execution risk in the company's strategy to turnaround its operations as well as the company's weak liquidity profile, which leaves limited room for error.
A downgrade could occur if the company is unable to put in place a sustainable capital structure, including the refinancing of its revolver, or if liquidity worsens and free cash flow remains negative. Debt to EBITDA that is sustained at or above the mid 9 times, FFO + Interest to Interest below 1 times, and Retained Cash Flow to Net Debt of less than 3.5% would also pressure the ratings.
A positive rating action is unlikely given weak end market fundamentals and continued execution risk in the company's turnaround strategy. However, an upgrade could occur with a positive inflection in liquidity and operating performance such that Debt to EBITDA and FFO + Interest to Interest approached 8 times and 2 times, respectively, on a sustained basis. Positive free cash flow generation that grows revolver availability materially or a capital structure that provides more access to liquidity in the face of difficult operating conditions, could also support an upgrade as could successful execution of the strategy.
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