(The following statement was released by the rating agency) Overview
-- U.S. government contractor Artel is proposing the issuance of a $145 million senior secured credit facility, comprising a $125 million term loan and a $20 million revolving credit facility, to refinance existing debt and redeem preferred equity.
-- We are assigning our 'B' corporate credit rating to the company. The outlook is stable.
-- At the same time, we are assigning a 'B+' issue-level rating with a recovery rating of '2' to the proposed senior secured credit facility, which includes a term loan and a revolving credit facility.
-- The stable outlook reflects our expectation that the company's track record of execution on satellite network services contracts and current backlog from its contracted client set will provide a measure of ratings stability over the near term.
Rating Action On 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's proposed senior secured credit facilities, which include a $125 million term loan and a $20 million revolving credit facility, both due 2017. The '2' recovery rating indicates our expectation of substantial (70%-90%) recovery in the event of payment default.
The company intends to use the proceeds from the transaction to refinance existing debt and redeem preferred equity.
The ratings on Artel reflect the company's "weak" business risk profile which derives from its narrow market focus, contract and customer concentrations, and competition from larger satellite services peers. The ratings also reflect its "highly leveraged" financial profile with leverage of 5.1x, pro forma for the transaction and treating preferred equity as debt. Nevertheless, we expect the company's market position, as demonstrated by its win rate on U.S. federal contracts, 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 with its proprietary terrestrial network and third-party equipment to create end-to-end global communications solutions. Artel leverages the various geographic and technological capabilities of the different satellite operators to meet the communications needs of its clients. The company's key legacy contract, DISN Satellite Transmission Service-Global (DSTS-G), is currently transitioning to a new vehicle, Future COMSATCOM Services Acquisition (FCSA), under which we anticipate it will face increased competition for task order awards.
We view the company's business risk profile as weak due to its niche U.S. federal satellite services focus, its contract and customer concentrations with the DSTS-G and FCSA contracts representing nearly all of its revenue and backlog, and increased competition both on the FCSA contract with an increased number of eligible contractors and the threat of backward integration by the satellite operators. Partially offsetting these factors are the company's strong track record of performance, reinforced by its high win rates, along with EBITDA margins that fall at the high end of the range for IT services government contractors due to the high proportion of successfully executed fixed-price contracts.
We expect that in 2012, revenues will fall below $320 million from over $400 million in 2011, with EBITDA margins around 10% down from the 12% area in the prior year, due to lower revenue associated with U.S. troop drawdowns. However, we expect that the company's track record of performance and relationships with end users will allow it to benefit from new FCSA task order awards such that 2013 revenues could rebound to near 2011 levels, albeit likely with lower margins on increased competition. New competitive dynamics, along with contract award and DoD budget uncertainty, contribute to a wide range of possible outcomes for 2013 revenue and profitability.
We view the company's financial profile as highly leveraged, with adjusted debt to EBITDA of 5.1x as of June 2012, pro forma for the transaction. For analytical purposes, we treat the company's preferred equity as debt, which adds about 2x to adjusted leverage. We expect that leverage will increase to the low- to mid-6x area in the near term due to the aforementioned FCSA task order delays, but leverage should begin to decrease modestly in the latter half of 2013. We expect free cash flow to remain positive, but we do not expect it to be used for material debt reduction. The company's relatively small EBITDA base limits its ability to absorb negative operational surprises.
Artel's liquidity is "adequate," with sources of cash likely to exceed uses over the next 12 to 24 months. Cash sources include a $5 million cash balance after the transaction, full availability of its proposed $20 million revolving credit facility, and modest but positive annual free operating cash flow. We expected sources to include modest working capital investment, capital expenditures, and required debt amortization of about $5 million over the next year.
Our view of Artel's liquidity position incorporates the following expectations, assumptions, and factors:
-- Sources of cash are likely to exceed uses by at least 1.2x over the next 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 at least 15% headroom.
Recovery analysis For the complete recovery analysis, see the recovery report on Artel, to be published separately on RatingsDirect.
The stable outlook reflects Artel's good market position and customer relationships in its niche as the result of a successful track record of execution on contracts. Although unlikely in the near term, we could raise the rating if new contract wins spur strong revenue growth, profitability, and diversity 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 deteriorating operating performance and leverage rising to above 7x. Debt-financed acquisitions or shareholder returns that also result in leverage above 7x could perpetuate a downgrade as well.
Related Criteria And Research
-- Industry Report Card: Global Technology Recovery Slowed By Economic Headwinds, But Sector Ratings Trend Remains Fairly Balanced, Oct. 5, 2012
-- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, Sept. 27, 2012
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, But Ratings Remain Stable, June 11, 2012
-- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List New Ratings Artel LLC Corporate 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 on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)