Moody's Downgrades Erickson (EAC) to 'Caa2'; Outlook Negative

Moody's Investors Service, downgraded its ratings assigned to Erickson Incorporated (Nasdaq: EAC): Corporate Family to Caa1 from B2, Probability of Default to Caa1-PD from B2-PD, Senior Secured Second Lien to Caa2 from B3, and Speculative Grade Liquidity rating to SGL-4 from SGL-3. The ratings outlook is negative.

Moody's has taken the following actions:

Issuer -- Erickson Incorporated:

Corporate Family Rating, downgraded to Caa1 from B2;

Probability of Default rating, downgraded to Caa1-PD from B2-PD

Senior Secured Second Lien Notes due 2020, downgraded to Caa2 from B3 (LGD4);

Speculative Grade Liquidity rating, downgraded to SGL-4 from SGL-3.

The ratings outlook is negative.

RATINGS RATIONALE

The downgrade of the Corporate Family Rating (CFR) to Caa1 better aligns the ratings with Erickson's credit profile, based on projected credit metrics and a weak liquidity position characterized by negative free cash flow, a reliance on the revolver, and limited covenant headroom and availability under the company's revolving credit facility. The downgrade also reflects the execution risk in the company's strategy to turnaround its operations from the weak performance sustained following its acquisition of Evergreen Helicopters Inc (EHI). Factors such as underestimating the capital needed to improve the operability of the acquired aircraft, quicker than anticipated reductions in demand by US Department of Defense organizations, and limited success in expanding the commercial customer base and diversifying beyond the company's pure legacy air-crane and heavy lift operations have led to declines in revenues and earnings, weakened liquidity and credit metrics that do not support the B2 rating.

Moody's believes the company's current strategy designed by its relatively new CEO, who joined in April 2015, paves a path towards better operating results and improved financial condition. Moody's anticipates, however, that this will be a multi-year effort. New sales managers with experience in the company's targeted verticals have been hired. Erickson has, or will, exit services where it lacks a competitive advantage, far off-shore oil platforms as an example. The company will continue evaluating its cost structure to become more cost-efficient. We believe that Erickson will seek to expand its MRO services, focused on global support of particular out-of-production rotary aircraft that have large installed bases, such as the company's Bell 214 helicopter program. It will also pursue organic growth internationally, including the leveraging of its expertise in air-crane services.

The Caa1 Corporate Family rating reflects the potential for credit metrics to marginally strengthen into 2017, aided by cost management and some revenue enhancement from recent contract wins. The rating also considers that the success of the company's strategy relies on new markets and customers amid slowing global economic growth that pressures government budgets and the competitive response of incumbents in the markets in which Erickson seeks to focus. Additionally, the unknown growth potential of the security segment, particularly covering work for the U.S. Department of Defense and the extent to which the market for helicopter services is underserved could derail the company's progress. As well, over 30% of Erickson's aircranes and over 50% of its fixed wing, medium and light lift aircraft (mostly helicopters) were operable but not in revenue service as of December 31, 2015. 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.

Moody's expects that the few recently-announced contract awards or extensions and a focus on controlling G&A, working capital and capital investment will support a positive inflection in credit metrics into 2017. Moody's believes that company will remain focused on managing its costs to achieve at least breakeven free cash flow to alleviate its reliance on the $140 million revolving credit, due in May 2018. The cyclical nature of demand across its core air-crane service lines, including fire-fighting, logging and infrastructure construction also contribute to the risk profile.

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, using Moody's Loss Given Default rating methodology, reflects a reduction in the first loss position provided by the notes and higher revolver drawings, following the two-notch downgrade of the CFR.

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 access its revolver due to borrowings that lead to the testing of its fixed charge coverage covenant. Inability to increase utilization of aircraft to support earnings growth and strengthen its credit metrics, such that free cash flow remains negative could also lead to a downgrade. Debt to EBITDA that is sustained above 7 times, FFO + Interest to Interest below 1 times, and Retained Cash Flow to Net Debt of less than 6% could also pressure the ratings.

A positive rating action could follow if Debt to EBITDA and FFO + Interest to Interest approach the low to mid 6 times and 2 times, respectively, on a sustained basis. Positive free cash flow generation that grows revolver availability in excess of $35 million could also support an upgrade as could successful execution of the strategy.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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