Moody's says Excelitas' proposed $80 million first lien term loan facility to acquire Axsun is a moderate credit negative; ratings unaffected
Moody's Investors Service ("Moody's") says EXC Holdings III Corp.'s (dba Excelitas) proposed $80 million incremental first lien term loan facility to fund the acquisition of Axsun is a modest credit negative, but it does not impact the company's B3 Corporate Family Ratings or stable rating outlook. Following the add-on, the USD denominated first lien term loan will increase to $685 million from $605 million ($681 million outstanding proforma at September 30, 2018). The $80 million proceeds along with $1.2 million of cash on hand will be used to fund the acquisition and approximately $5 million in transaction fees and expenses.
Moody's views the proposed transaction as a moderate negative because it increases the company's leverage to 7.1 times from 6.8 times (Moody's adjusted debt-to-EBITDA pro forma for the twelve months ended September 30, 2018). Moody's considers this level of leverage to be high for a company with exposure to foreign exchange volatility in its earnings and cyclical end-markets. Furthermore, integration risk is heightened as management recently completed the acquisition of REO in July 2018. The ratings are unaffected because leverage remains within the range tolerated at the B3 rating level and is expected leverage to improve long term through mandatary debt amortization on the first lien term loan and continued organic EBITDA growth.
The company will be funding some of the transaction costs with cash on hand, decreasing its cash balance to $29.8 million from $31 million. Moody's does not anticipate this cash to be used for debt repayment. Instead, it is expected that management will use any positive free cash flow it generates to reinvest in the business through additional bolt-on-acquisitions, capital expenditures, or working capital investments. The additional interest burden is approximately $5 million per year, though this will be offset partially by the incremental earnings contribution from Axsun.
Subscribers to Moody's research are directed to the associated research, including the most recent Issuer Comment and Credit Opinion for EXC Holdings III Corp., which can be found on the rating agency's website at www.moodys.com.
Axsun designs, manufactures and sells advanced photonics products and other micro-scale optical devices used in a variety of end markets including medical imaging, industrial and telecommunications. Axsun is a complimentary fit to Excelitas' commercial segment and the businesses have minimal product overlap. Between the Axsun and REO acquisitions, management expects to realize a modest amount of cost savings over time. However, there are likely to be initial costs associated with realizing these efficiencies.
Excelitas is a global manufacturer of a portfolio of custom designed photonic components, sub-systems, and integrated solutions to OEMs serving a wide range of applications within various health, environmental, safety, security, industrial, aerospace and defense markets. The company operates through two primary business units: Commercial (i.e. optics, detection and illumination) and Defense & Aerospace (i.e. Advanced Electronic Systems, Advanced Optronics, and Land Equipment). Pro forma for the acquisition, the company generated $891 million of revenue for the twelve months ended September 30, 2018. Excelitas was acquired by private equity firm AEA Investors in December 2017.
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