Wesco Aircraft Holdings, Inc. (New) -- Moody's downgrades Wesco Aircraft Holdings, Inc. ratings (CFR to Caa3); outlook negative

Rating Action: Moody's downgrades Wesco Aircraft Holdings, Inc. ratings (CFR to Caa3); outlook negative

Global Credit Research - 30 Jul 2020

New York, July 30, 2020 -- Moody's Investors Service ("Moody's") downgraded its ratings for Wesco Aircraft Holdings, Inc. (New) ("Wesco"), including the company's corporate family rating (CFR, to Caa3 from Caa1) and probability of default rating (to Caa3-PD from Caa1-PD), as well as the ratings for its senior secured notes (to Caa3 from Caa1) and senior unsecured notes (to Ca from Caa3). The ratings outlook remains negative.

RATINGS RATIONALE

The downgrades reflect Moody's expectation of pronounced earnings and cash flow pressures during 2020 due to disruptions from the aftermath of the coronavirus crisis. These disruptions will be particularly evident in Wesco's commercial aerospace end-markets, which represent about 70% of company sales. The downgrades also consider Wesco's weak credit metrics (Moody's adjusted debt-to-EBITDA in excess of 10x), limited availability under the revolver, as well as near-term working capital requirements and the company's high interest burden, which will both result in a very meaningful consumption of cash over the remainder of 2020.

The Caa3 CFR balances Wesco's position as a leading services provider and distributor to the aerospace and defense industries against the company's aggressive governance evidenced by its high tolerance for financial risk and weak balance sheet with a thin capitalization. The large-sized combination of Wesco and Pattonair creates near-term execution and integration risk in an industry where inventory optimization and consistent on-time customer deliveries are of paramount importance. This elevated risk is against a backdrop of a highly leveraged balance sheet with modest cash reserves and pending earnings and cashflow headwinds from the coronavirus outbreak. The difficult operating environment, which is likely to endure for some time, combined with a poorly capitalized balance sheet and expectations of negative free cash flow, give rise to the possibility of some form of default over the next 12 to 24 months.

The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Notwithstanding some early signs that the adverse impact of the coronavirus outbreak on Wesco and the deterioration in credit quality that it triggered may be relatively short-lived and subsiding, the company remains vulnerable to shifts in market demand and changing sentiment in these unprecedented operating conditions.

The negative outlook reflects the uncertainty as to the depth and duration of the disruptive effects of the coronavirus as well as Moody's expectation that, at a minimum, the virus will create meaningful earnings headwinds and a resultant weakening of key credit metrics through at least the end of 2020.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Any upgrade would be predicated on Wesco improving its liquidity profile with expectations of limited cash burn and improved borrowing availability under the revolving credit facility. Strong execution on the Pattonair transaction that results in the realization of targeted synergies and meaningful earnings growth would also be necessary for any ratings upgrade.

Factors that could lead to a downgrade include a weakening liquidity profile involving the expectation of cash usage during 2020 beyond what is currently contemplated, a diminishment of capacity under the ABL facility or an anticipated breach of financial covenants. An inability to increase inventory turns in the legacy Wesco operations could also result in a downgrade. An inability to realize targeted synergies, the loss of a large customer, poor execution on the Pattonair transaction or operating issues that resulted in lower customer service levels could also result in a downgrade.

The following summarizes today's rating actions:

Issuer: Wesco Aircraft Holdings, Inc. (New)

Corporate Family Rating, downgraded to Caa3 from Caa1

Probability of Default Rating, downgraded to Caa3-PD from Caa1-PD

Senior Secured Regular Bond/Debenture, downgraded to Caa3 (LGD3) from Caa1 (LGD3)

Senior Unsecured Regular Bond/Debenture, downgraded to Ca (LGD5) from Caa3 (LGD5)

Outlook, Remains Negative

Wesco Aircraft Holdings, Inc., headquartered in Valencia, California, is a leading distributor and provider of supply chain management services to the global aerospace industry. Services include the distribution of C-class hardware, chemical and electrical products as well as quality assurance, kitting, just-in-time delivery and point-of-use inventory management. Pattonair, headquartered in Derby, UK, is a leading supply chain management services provider focusing on parts distribution as well as sourcing and procurement, forecasting and inventory planning, supplier management, and operations and quality assurance. The combined companies will offer more than 640,000 active SKUs and are expected to have pro forma revenues of about $2.2 billion for the twelve months ended March 2020.

The principal methodology used in these ratings was Aerospace and Defense Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1224306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Eoin Roche Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Russell Solomon Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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