OREANDA-NEWS. S&P Global Ratings said today that it has assigned its 'BB-' issue-level rating and '2' recovery rating to the proposed $965 million first-lien credit facility issued by Engility Holdings Inc.'s subsidiary Engility Corp., which is composed of a $165 million revolving credit facility due 2021, a $200 million term loan B1 due 2020, and a $600 million term loan B2 due 2023. The '2' recovery rating indicates our expectation for meaningful recovery (70%-90%; lower end of the range) in a payment default scenario.

We also assigned our 'B-' issue-level rating and '6' recovery rating to Engility Corp.'s proposed $380 million unsecured notes. The '6' recovery rating indicates our expectation of minimal (0%-10%) recovery.

At the same time, we affirmed our 'B+' corporate credit rating on Engility Holdings Inc. The outlook is stable.

"The affirmation reflects the slightly positive impact that the proposed refinancing will have on the company's credit ratios, which have been weaker than expected in recent quarters," said S&P Global credit analyst Christopher Denicolo. While the proposed refinancing should help improve Engility's credit ratios, it will not have enough of an impact to cause us to revise our assessment of the company's financial risk profile. The refinancing will reduce the company's interest costs by about $15 million-$20 million per year due to the high coupons on its existing debt, freeing up more cash flow for debt repayment. In addition, Engility's liquidity will improve somewhat due to the increase in the size of its revolver, which will grow to $165 million from $115 million currently. However, the company's total debt will increase slightly to pay for the premiums on its existing debt and fees and expenses related to the refinancing.

The stable outlook on Engility reflects our expectation that the company's credit ratios, which are currently somewhat weak for the rating, will improve over the next 12-24 months due to revenue and earnings growth and some debt repayment. Also, the company's cash generation should remain good and will benefit from its lower interest expenses following the proposed refinancing.

We could raise our ratings on Engility if the company's debt-to-EBITDA metric falls below 4.5x and its FFO-to-debt ratio increases to the high-teens percent area on a sustained basis. We believe that this would most likely be caused by debt reduction and earnings growth from market share gains or increased EBITDA margins enabled by management's cost-reduction efforts.

We could lower our ratings on Engility if the company's debt-to-EBITDA metric increases above 6x for a sustained period of time, which would most likely be caused by greater-than-expected operating challenges that lead to lower earnings--including the loss of key contracts from budget reductions--integration-related problems, increased price competition for new awards, or (though less likely) increased debt to fund an acquisition or shareholder rewards.