Fri 09/11/2020 09:21 AM
Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
TransDigm Inc.’s Debt Documents

TransDigm Group Inc., through its wholly owned subsidiary TransDigm Inc., “is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today,” according to its most recent 10-Q.

Continue reading for the Covenants by Reorg team's covenant analysis of TransDigm, and request a trial to access the accompanying tear sheet/debt document summaries as well as our coverage of thousands of other credits. 

According to CEO Kevin Stein, “Throughout our third fiscal quarter [which ended June 27] much of the global fleet was grounded and there was a substantial reduction in both passenger demand and air traffic due to the COVID-19 pandemic and the ensuing widespread lockdowns.” The company disclosed that its net sales for the quarter declined 32.8% year over year, and its quarterly EBITDA was down 35.7% year over year. After implementing various cost-saving measures, however, the company is “better positioned” to “endure and emerge strongly from the ongoing weakness” caused by the Covid-19 pandemic, said Stein.

The company’s capital structure as of June 27 is shown below for reference.
TransDigm covenant analysis capital structure from Covenants by Reorg

 
Acquisition Strategy

TransDigm has completed a number of acquisitions over the past few years, including its acquisition of (i) Esterline on May 14, 2019, for a purchase price of almost $4 billion, (ii) Skandia on July 13, 2018, for a purchase price of about $84 million, (iii) Extant on April 24, 2018, for a purchase price of about $533 million, and (iv) Kirkhill on March 15, 2018, for a purchase price of about $49 million.

On its recent earnings-call, although, management stated that “both the M&A and the capital markets are always difficult to predict but especially so today. Acquisition opportunities in the last quarter were minimal.” Management went on to say that:
“Once the smoke clears, our preference is always to make accretive acquisitions. Well, our first preference is to fund our businesses, but that shouldn't be a problem, because they'll run cash positive. Our next choice is always to make accretive acquisitions that fit our strategy when we can find them. If we can't find them, our third choice is to give it back to the shareholders in some form. And our last choice is probably to pay off the debt, particularly given the level of our cost of debt now.”

The company’s debt documents provide it with significant flexibility to consummate additional acquisitions, including to fund acquisitions with debt.

Under TransDigm’s secured and subordinated notes, the company is not restricted from making acquisitions, if the acquired entities become restricted subsidiaries and can incur debt to finance acquisitions, as long as it can meet a pro forma 2x fixed charge coverage ratio or ensure its fixed charge coverage ratio is not worse than the ratio prior to the incurrence.

Under the credit agreement, the company can consummate acquisitions, as long as it can meet a pro forma 7.25x total leverage ratio and has at least $100 million of liquidity (defined as unrestricted cash, plus revolving availability); although the credit agreement does not include a specific basket for debt to finance acquisitions, the company can incur junior lien or unsecured debt, subject to meeting a 7.25x total leverage ratio, and can incur additional pari debt, subject to meeting a 5x secured leverage ratio.

Based on financials as of June 27, TransDigm can incur about $3.7 billion of debt under the 5x secured leverage test and almost $3 billion of debt under the 7.25x total leverage test.

Under all of the company’s debt documents, EBITDA is defined to include cost savings and synergies not to exceed 25% of EBITDA, as long as they are projected in good faith to be realized within 24 months.
Covenant Conclusions

 

  • Springing financial covenant - The credit agreement contains a 7.25x total net leverage ratio financial maintenance covenant for the benefit of only the revolving lenders and only tested when revolving usage (excluding cash collateralized letters of credit) exceeds 35%. Although the maintenance covenant is not currently in effect, the company’s 6.1x current net leverage is well below the required threshold.



  • Debt and liens - As long as the company is in compliance with a 2x fixed charge coverage ratio, the loan parties can incur $3,741 million of additional first lien secured debt, $2,737 million of additional junior lien secured debt and $250 million of unsecured debt. If the fixed charge coverage ratio is less than 2x, the loan parties can incur $3.198 billion of additional first lien secured debt. Either way, foreign restricted subsidiaries can incur $450 million of secured debt.



  • Restricted payments - Currently, the company can make $75 million of restricted payments (which includes open market purchases of the subordinated notes), plus $4.545 billion of general investments, an additional $250 million of investments in unrestricted subsidiaries and $1 billion of investments in “joint ventures.”




Although the company is able to meet specified leverage and fixed charge coverage ratios to access leverage-based restricted payment baskets under each of its debt documents, in order to access the leverage-based basket under its credit agreement, the revolver must be undrawn.

Therefore, to the extent the company repays all outstanding revolving borrowings, TransDigm will not be restricted from paying dividends, making investments, including transferring assets to unrestricted subsidiaries, or, under its secured debt, purchasing the subordinated notes in the open market.


--Alisha Turak
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