BE Aerospace (BEAV) Outlook Lowered to Negative by Moody's

Moody's Investors Service has affirmed the debt ratings of B/E Aerospace, Inc. (Nasdaq: BEAV), including the Ba1 corporate family and Ba2 senior unsecured ratings, but changed the rating outlook to negative from stable.

Ratings/Outlook changed:

Rating Outlook, to Negative from Stable

Ratings affirmed:

Corporate Family Rating, Ba1

Probability of Default Rating, Ba1-PD

$950 million senior secured revolver due 2017, Baa2, LGD2, 12%

$650 million senior unsecured notes due 2020, Ba2, LGD4, to 67% from 64%

$1,300 million senior unsecured notes due 2022, Ba2, LGD4, to 67% from 64%

Speculative Grade Liquidity Rating, SGL-1

RATINGS RATIONALE

The negative rating outlook follows B/E's announcement that it intends to separate its business into two independent, publically traded companies comprised of a "Manufacturing Co" which will focus on aircraft cabin interior equipment and a "Services Co" which will be comprised of B/E's consumables business focusing on the aerospace and energy services markets.

It remains to be seen how existing debt will be, if indeed can be, allocated between the two companies after the separation. The transaction is not likely to be completed until early 2015. That said, Moody's notes that the separation could result in a sizable increase in B/E's leverage if all existing debt were to remain with B/E Aerospace following the spin-off of the consumables business. Under this scenario, B/E's stand-alone earnings capacity would likely be reduced by about 40% (the reported portion of the consumables business). Moody's estimates this could increase debt to EBITDA by approximately 2 turns from about 3.3x to 5.3x.

The Ba1 corporate family rating reflects B/E's leadership position as the world's largest manufacturer of aircraft cabin interior products and its strong position as a distributor of consumables, as well as the aerospace cycle with record delivery rates expected over the near term and the OEM backlog. Credit metrics are supportive of the rating category, although B/E has a record of making debt funded acquisitions which increase financial leverage, but then uses the cash flow to reduce debt and restore the leverage metrics to pre acquisition levels within a reasonable time. For example, B/E plans to acquire EMTEQ and Fisher for about $470 million, which are expected to be debt financed. On a pro-forma basis assuming the debt financing and the profit of the acquisition target, Moody's estimates that debt to EBITDA would be increased by over half a turn to about 3.3x

The SGL-1 Speculative Grade Liquidity rating reflects our expectation of a strong liquidity profile over the near term, supported by cumulative positive free cash flow generation, a cash balance of approximately $300, and continued access to the revolving credit facility which matures in 2017. The expectation of cumulative free cash flows is supported by B/E's large installed product base, strong profit margins and the current favorable phase of the aerospace demand cycle.

The rating could come under downward pressure if operating margins tighten leading to Debt to EBITDA exceeding 3.5 times and EBIT-to-Interest below 3.0 times. Moody's notes that the ratings could be downgraded as the allocation of debt in connection with the proposed separation becomes clearer. Weak operating performance leading to a deterioration in earnings capacity could also pressure the ratings down. At this time, a ratings upgrade is unlikely until we have greater clarity on the allocation of debt and the relative growth and cash flow prospects of the two companies.

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