TransDigm stalls refi of $3.54 billion debt, sells $1.15 billion debt

By Devika Patel

Knoxville, Tenn., Feb. 7 – TransDigm Group Inc. had a busy few months in the markets, including a $3.54 billion debt refinancing that was then put on hold when the company’s loans fell below par in secondary trading.

But the company did still manage to complete another financing, for $1.15 billion.

Executives said that the company has no plans to pay off debt anytime soon.

“This quarter, we were pretty active in the capital markets,” chief executive officer W. Nicholas Howley said on the company’s first quarter earnings conference call on Tuesday.

“In Q1, we raised about $1.2 billion of debt, to both partially fund the dividend and also to refinance some of our existing debt.

“We also planned to take advantage of a continuing strong debt market in early Q2 to refinance about $1.2 billion of our term loans,” he said.

“The purpose was to slightly reduce interest rates and also to extend the maturity.

“We did not intend to raise any new money at that time,” he emphasized.

“Our debt was trading a little over par.

“When the stock dropped 10% on Friday, Jan. 20, the debt traded down to par, or slightly below,” Howley said.

On Jan. 20, the day of president Donald Trump’s inauguration, short seller Andrew Left of Citron Research, reported that Trump had made public trades signifying that he was betting against TransDigm, resulting in the dramatic drop.

Left also criticized the company’s business model.

“This business model has made them a dominant supplier of airplane parts to the aerospace industry while burdening its balance sheet with sky-high debt load: in fact, 6.5x EBITDA leverage,” Left’s article read.

“TransDigm’s single largest customer is the Department of Defense, followed by Boeing and Airbus.”

On Dec. 12, then president-elect Donald Trump stated: “The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.”

Howley didn’t mention Left’s article but he did say that the weak trading levels for the company’s debt was the reason that TransDigm did not go forward with the refinancing.

“As a result [of the debt prices falling], the expense to do the refi didn’t make any sense with no interest rate savings, so we put the deal on hold and will review the status regularly,” Howley said.

“Access to the market was not and has never been an issue.

“We simply didn’t see any savings and it wasn’t worth the expense,” he said.

Howley added that the company does not expect to pay off debt in the near future.

“Given the low cost of debt, especially after tax, [paying off debt] is likely to be our last choice [for spending cash] in current capital market conditions,” Howley said.

“About 75% of our debt is either fixed or capped.

“The net result is to significantly reduce our exposure and interest rate movements through 2020 at least.

The company also arranged a $500 million interest rate swap and a $40 million interest rate cap during the quarter.

“During the quarter, we entered into a new $500 million interest rate swap, fixed at 1.9%, and a new $40 million interest rate cap, at a capped rate of 2.5%,” chief financial officer Terrance Paradie said on the call.

The company generated $226 million of cash from operating activities and ended the quarter with $972 million of cash on the balance sheet.

Notes

On Oct. 13, the Cleveland-based designer, producer and supplier of highly engineered aircraft components for use on commercial and military aircraft said its subsidiary TransDigm Inc. began tendering for its 7½% senior subordinated notes due 2021.

The total purchase price was $1,060.50 for each $1,000 of notes tendered by Oct. 26, the early tender date.

The total payment included an early tender premium of $30.00 per $1,000 of notes.

Holders who tendered after the early deadline received $1030.50 per $1,000 of notes.

The company also agreed to pay accrued interest to but excluding the payment date.

The tender offer closed on Nov. 10.

Term debt

In October 2016, TransDigm completed syndication of a fungible $1.15 billion incremental first-lien term loan F (Ba2/B) due June 2023 at pricing of Libor plus 300 basis points with a 0.75% Libor floor and an original issue discount of 99.5.

The spread and the floor on the incremental term loan F matches existing term loan F pricing, and all of the debt has 101 soft call protection through June 2017.

Proceeds were used to fund a shareholder distribution and to redeem 7½% senior subordinated notes due 2021.

On Jan. 11, TransDigm Group Inc. held a lender call, launching a $1,225,000,000 seven-year covenant-light first-lien term loan G (Ba2/B) with price talk of Libor plus 275 basis points with no Libor floor and an original issue discount of 99 to 99.5.

The loan was upsized to $2,029,000,000 on Jan. 19 and the discount finalized at 99.75 the next day.

Proceeds were set to be used to refinance a term loan C due Feb. 28, 2020 that is priced at Libor plus 300 bps with a 0.75% Libor floor, and, due to the upsizing, to refinance a term loan D due June 2021 that is priced at Libor plus 300 bps with a 0.75% Libor floor.

Meanwhile, on Jan. 20, TransDigm launched a repricing of its $1,514,000,000 term loan E (Ba2/B). The repricing was intended to cut the Libor spread to 275 bps from 300 bps and remove the 0.75% Libor floor.

The issue price was set at par.

Credit Suisse was lead on the repricing.

However later in the day the timing for the loans was changed, with the deadlines for the company’s term loan G refinancing deal and the term loan E repricing both backed up until a to-be-determined date and time. The transactions were subsequently abandoned.

Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Morgan Stanley Senior Funding Inc., UBS Investment Bank, Barclays, Goldman Sachs Bank USA, HSBC Securities Corp. and RBC Capital Markets were the leads on the deal.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.