Moody’s downgrades Kratos to Caa2

Moody's Investors Service said it downgraded ratings of Kratos Defense & Security Solutions, Inc., including the corporate family rating to Caa2 from Caa1.

The outlook is stable.

Moody’s said the corporate family rating was downgraded because Kratos' revenue decline since 2013 along with an operating cash flow deficit and weak interest coverage of late make the capital structure seem potentially untenable.

Over the first nine months of 2015, reported funds from operation interest coverage, pro forma for the August 2015 Herley divestiture and associated $216 million debt reduction, was weak at 0.8 times. Kratos' estimates that its 2015 debt to EBITDA (excludes a range of special items) ratio will be 10 times to 11 times. Credit metrics may not materially improve in 2016. R&D and proposal spending within Kratos' unmanned aerial systems, which has added expense and capital expenditure, will, at a minimum, continue across the first half of 2016.

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