OREANDA-NEWS. S&P Global Ratings said today that it has assigned its 'B+' issue-level rating and '3' recovery rating to Wesco Aircraft Holdings Inc.'s proposed $600 million credit facility, which will be issued by its subsidiary Wesco Aircraft Hardware Corp. The facility comprises a $200 million revolving credit facility due 2021 and a $400 million term loan A due 2021. The '3' recovery rating reflects our expectation for meaningful (50%-70%; lower half of the range) recovery in the event of a payment default.

At the same time, we affirmed our 'B+' corporate credit rating on Wesco. The outlook remains positive.

"The affirmation reflects the slightly positive impact that the proposed refinancing will have on Wesco's interest expense and that the more gradual step downs of the leverage covenant in the new facility--along with continued revenue and earnings growth--should allow the company to improve its liquidity over the next year," said S&P Global credit analyst Tennille Lopez. Wesco's revenue and earnings were recently affected by the loss of a large commercial hardware contract, which ended in 2015, and various impairment and restructuring charges. Over the next two years, we expect that the company's credit metrics will improve as it wins new contracts and renews its existing ones. In addition, Wesco's cost structure should also improve as management increasingly focuses on cost savings and efficiency initiatives. However, the pace of this improvement is still somewhat slower than we had previously expected. We anticipate that the company's funds from operations (FFO)-to-debt ratio will be 15%-20% and its operating cash flow (OCF)-to-debt ratio will be 12%-16% in fiscal year 2017.

The positive outlook on Wesco reflects our expectation that the company's new credit facility will somewhat reduce its interest expense and that the more gradual step downs in the facility's leverage covenant will allow it to improve its liquidity. Although we still expect that the company's covenant cushion will increase to more than 15%, there remains some uncertainty over how quickly this improvement will materialize as Wesco's earnings have recently been below our expectations.

We could raise our ratings on Wesco if increased earnings or debt reduction causes the company's covenant cushion to increase to at least 15%. We could also raise our ratings on the company if its EBITDA margins improve such that its FFO-to-debt and OCF-to-debt ratios both increase to at least 15% on a sustained basis.

We could revise our outlook on Wesco to stable if the company is unable to reduce its costs and increase its earnings as we expect, or if a lower-than-expected level of debt repayment causes its covenant headroom to remain below 15%.