(The following statement was released by the rating agency)Overview
-- U.S. government contractor Artel is proposing the issuance of a $145million senior secured credit facility, comprising a $125 million term loanand a $20 million revolving credit facility, to refinance existing debt andredeem preferred equity.
-- We are assigning our 'B' corporate credit rating to the company. Theoutlook is stable.
-- At the same time, we are assigning a 'B+' issue-level rating with arecovery rating of '2' to the proposed senior secured credit facility, whichincludes a term loan and a revolving credit facility.
-- The stable outlook reflects our expectation that the company's trackrecord of execution on satellite network services contracts and currentbacklog from its contracted client set will provide a measure of ratingsstability over the near term.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services assigned its 'B'corporate credit rating to Reston, Va.-based Artel LLC. The outlook is stable.
At the same time, we assigned a 'B+' issue-level rating to the company'sproposed senior secured credit facilities, which include a $125 million termloan and a $20 million revolving credit facility, both due 2017. The '2'recovery rating indicates our expectation of substantial (70%-90%) recovery inthe event of payment default.
The company intends to use the proceeds from the transaction to refinanceexisting debt and redeem preferred equity.
The ratings on Artel reflect the company's "weak" business risk profile whichderives from its narrow market focus, contract and customer concentrations,and competition from larger satellite services peers. The ratings also reflectits "highly leveraged" financial profile with leverage of 5.1x, pro forma forthe transaction and treating preferred equity as debt. Nevertheless, we expectthe company's market position, as demonstrated by its win rate on U.S. federalcontracts, will provide key support for the rating.
Artel provides satellite network services to Department of Defense (DoD)clients. The company combines bandwidth from several satellite operators withits proprietary terrestrial network and third-party equipment to createend-to-end global communications solutions. Artel leverages the variousgeographic and technological capabilities of the different satellite operatorsto meet the communications needs of its clients. The company's key legacycontract, DISN Satellite Transmission Service-Global (DSTS-G), is currentlytransitioning to a new vehicle, Future COMSATCOM Services Acquisition (FCSA),under which we anticipate it will face increased competition for task orderawards.
We view the company's business risk profile as weak due to its niche U.S.federal satellite services focus, its contract and customer concentrationswith the DSTS-G and FCSA contracts representing nearly all of its revenue andbacklog, and increased competition both on the FCSA contract with an increasednumber of eligible contractors and the threat of backward integration by thesatellite operators. Partially offsetting these factors are the company'sstrong track record of performance, reinforced by its high win rates, alongwith EBITDA margins that fall at the high end of the range for IT servicesgovernment contractors due to the high proportion of successfully executedfixed-price contracts.
We expect that in 2012, revenues will fall below $320 million from over $400million in 2011, with EBITDA margins around 10% down from the 12% area in theprior year, due to lower revenue associated with U.S. troop drawdowns.However, we expect that the company's track record of performance andrelationships with end users will allow it to benefit from new FCSA task orderawards such that 2013 revenues could rebound to near 2011 levels, albeitlikely with lower margins on increased competition. New competitive dynamics,along with contract award and DoD budget uncertainty, contribute to a widerange of possible outcomes for 2013 revenue and profitability.
We view the company's financial profile as highly leveraged, with adjusteddebt to EBITDA of 5.1x as of June 2012, pro forma for the transaction. Foranalytical purposes, we treat the company's preferred equity as debt, whichadds about 2x to adjusted leverage. We expect that leverage will increase tothe low- to mid-6x area in the near term due to the aforementioned FCSA taskorder delays, but leverage should begin to decrease modestly in the latterhalf of 2013. We expect free cash flow to remain positive, but we do notexpect it to be used for material debt reduction. The company's relativelysmall EBITDA base limits its ability to absorb negative operational surprises.
Artel's liquidity is "adequate," with sources of cash likely to exceed usesover the next 12 to 24 months. Cash sources include a $5 million cash balanceafter the transaction, full availability of its proposed $20 million revolvingcredit facility, and modest but positive annual free operating cash flow. Weexpected sources to include modest working capital investment, capitalexpenditures, and required debt amortization of about $5 million over the nextyear.
Our view of Artel's liquidity position incorporates the followingexpectations, assumptions, and factors:
-- Sources of cash are likely to exceed uses by at least 1.2x over thenext 12 to 24 months.
-- Net sources would be positive, even with a 15% drop in EBITDA.
-- Covenants will be set such that the company is likely to maintain atleast 15% headroom.
Recovery analysisFor the complete recovery analysis, see the recovery report on Artel, to bepublished separately on RatingsDirect.
The stable outlook reflects Artel's good market position and customerrelationships in its niche as the result of a successful track record ofexecution on contracts. Although unlikely in the near term, we could raise therating if new contract wins spur strong revenue growth, profitability, anddiversity and leverage declines below 5x on a sustained basis.
We could lower the rating if further delays in FCSA task order awards,increased competition, or the loss of a key customer leads to deterioratingoperating performance and leverage rising to above 7x. Debt-financedacquisitions or shareholder returns that also result in leverage above 7xcould perpetuate a downgrade as well.
Related Criteria And Research
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-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings ListNew RatingsArtel LLCCorporate Credit Rating B/Stable/--Senior Secured
$125 mil. term loan due 2017 B+
Recovery Rating 2
$20 mil. revolving cred fac B+
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)