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Moody's Corporation : Moody's downgrades Photonis's first lien term loan to (P)B2 from (P)B1, withdraws second lien rating, (P)B2 CFR unchanged

08/23/2013 | 11:09am US/Eastern
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London, 23 August 2013 -- Moody's Investors Service has today downgraded the provisional instrument rating on Photonis Technologies SAS's (Photonis) senior secured term loan to (P)B2 with a loss given default assessment (LGD) of LGD4 from (P)B1 and withdrawn the rating on the senior secured second lien term loan following the company's decision to change, during the current refinancing process, the envisioned capital structure to an essentially all first lien debt composition. In addition, the senior secured revolving credit facility will now have priority over the term debt, resulting in an upgrade of the provisional instrument rating to (P)Ba2 with an LGD1 from (P)B1. The provisional corporate family rating (CFR) remains unchanged at (P)B2 and the outlook on all ratings remains stable.

Moody's issues provisional ratings in advance of the final sale of securities and these reflect Moody's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation Moody's will endeavour to assign definitive ratings. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

Photonis is currently in a refinancing process. The change in provisional instrument ratings is primarily driven by the company's decision to amend its previously envisioned capital structure. The new capital structure is now expected to comprise of a EUR 250 million equivalent senior secured first lien term loan due 2019 and a EUR 30 million equivalent super senior revolving credit facility due 2018. The debt will be guaranteed by at least 80% of the group's EBITDA (the effectiveness of the guarantees is subject to French law). As a result, Moody's has withdrawn the rating on the senior secured second lien term loan and downgraded the now larger EUR 250 million equivalent senior secured first lien term loan due 2019 to reflect the absence of priority over a significant amount of debt.

Moody's notes that certain terms have also changed including a tighter threshold for permitted payments, increased expected interest charges and a steeper mandatory debt amortization of 1.25% per quarter. The higher expected interest charges in particular weigh on the company's interest cover metrics which Moody's now considers weaker for the rating category.

The unchanged (P)B2 CFR continues to reflect in the first instance Photonis's very focused product offering and end markets, comprising electro-optic components that are primarily used for night vision equipment in military applications and, to a lesser extent, for industrial or scientific purposes. The modest scale of the business in terms of revenues is reflective of this focused product offering and end market. The rating also incorporates (1) the company's high leverage following its refinancing; (2) a degree of concentration in terms of its customer base; (3) some growth challenges, for example in new regions given that the company's technology is of a sensitive nature and therefore requires government export approval; and (4) the challenges Photonis is facing in its ongoing efforts to enter the world's largest market for electro-optic components for image intensification night vision equipment, the US, and the need to innovate and compete with larger, more diversified and more resourceful US competitors in some international markets.

However, the rating also reflects the company's process knowledge and technological capabilities as the only European manufacturer of electro-optic components for image intensification night vision equipment. In addition, the company benefits from significant barriers to market entry provided by the manufacturing process and the sensitive nature of the technology. This sensitivity is evidenced by a significant degree of government oversight and regulation, also in the Netherlands and France, where Photonis's key manufacturing operations are located. Moreover, Photonis's exposure to defence end markets is balanced by the low proportion of total government defence budgets that night vision equipment represents and its crucial importance, which Moody's would expect to limit the impact of general spending cuts on the company although it ultimately remains exposed to government spending decisions and the timing of larger orders. Lastly, the rating reflects Moody's expectation that the company will generate visible free cash flow despite its continuous investment in research & development to develop next-generation products.

The consolidated audited accounts are prepared by Photonis International SAS, the direct holding company of Photonis Technologies SAS, and Moody's adjusts the financials for the stand-alone activities of the holding company. Moody's assumes that Photonis International SAS 's activities will essentially be limited to its function as a holding company for Photonis, which is also supported by certain covenants in the facility agreements, and that its claim on Photonis will remain limited to its ownership of Photonis's common equity.

OUTLOOK

The stable rating outlook continues to reflect Moody's expectation that Photonis will be able to maintain a steady operating performance, including sufficient liquidity based on visible free cash flow generation, despite the general pressure on national defence budgets in Europe and the US.

WHAT CAN CHANGE THE RATING UP/DOWN

Negative rating pressure could result from debt/EBITDA increasing above 5.0x and/or EBIT/interest falling below 2.0x, both as adjusted by Moody's. A decline in demand for Photonis's night vision equipment, measured as a visible reduction in order books, could also exert negative pressure on the rating. In addition, a deterioration in the company's liquidity profile could result in negative rating pressure. Conversely, increasing diversification in Photonis's product portfolio and/or end markets combined with debt/EBITDA falling below 3.5x as adjusted by Moody's could lead to positive rating pressure over time.

The principal methodology used in this rating was the Global Aerospace and Defense published in June 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

France-based Photonis Technologies SAS (Photonis) is a manufacturer of electro-optic components used in military night vision and industry & science applications. The company's products are key components of military night vision equipment based on image intensification technology and its Night Vision segment's revenues represented 84% of total revenues in 2012. The Industry & Science (11%) and Power Tubes (4%) segments leverage Photonis's know-how in terms of alternative civil and military uses for the technology, including for nuclear sensors or mass spectrometry. As of December 2012, the company generated EUR171 million in revenues and EUR57 million in company-adjusted EBITDA. Photonis was acquired by Axa Private Equity in 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Tobias Wagner
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Chetan Modi
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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