New York, December 12, 2012 -- Moody's Investors Service has lowered the Corporate Family Rating of Sotera Defense Solutions, Inc. to Caa1 from B3 and affirmed the bank credit facility rating of B3. The rating outlook is stable. The lowered CFR reflects a significant amount of year-over-year organic revenue decline during the first nine months of 2012 stemming from Sotera's Force Mobility and Modernization Solutions (FMMS) segment. FMMS demand will likely remain low ahead as the US military slows the rate of upgrade spending on many field equipment categories as US defense outlays decline. The affirmation of the bank debt rating, despite the lower CFR, anticipates a Q4-2012 $12.5 million term loan prepayment and scheduled accretion on the holdco subordinate note (unrated) that together will reduce secured debt as a proportion of the family's capital structure.

Ratings:

Corporate Family, to Caa1 from B3

Probability of Default, to Caa1 from B3

$28 million first lien revolver due 2016, affirmed at B3, LGD3, to 39% from 44%

$215 million first lien term loan due 2017, affirmed at B3, LGD3, to 39% from 44%

RATINGS RATIONALE

The Caa1 Corporate Family Rating recognizes Sotera's elevated financial leverage, limited liquidity and a low funded backlog level that together amplify credit risk. Estimated debt to EBITDA of 8x in 2012 (Moody's adjusted basis, including holdco subordinate note), pro forma for the Q4 term loan prepayment is on par with the Caa1 rating level. The company is in the process of amending its bank credit facility which should raise the likelihood of near-term covenant compliance but the added cushion expected may still tighten if the performance trend over the first nine months of 2012 does not stabilize. Further, the demand environment presents uncertainties across the defense contracting space as the wind down of US troops in Afghanistan by 2014 and fiscal pressures will lower US defense outlays. The Budget Control Act of 2011 and its sequestration component do not affect authorized commitments, such as those represented by Sotera's funded backlog. But the company's funded backlog to revenue ratio is only about 55%, a low level yet in-step with other services contractors who primarly operate through undefinitized ID/IQ (indefinite delivery, indefinite quantity) vehicles. The company's Technology and Intelligence Services segment (TIS, about 80% of Q1-Q3 2012 revenues) serves the intelligence community where funding levels should be comparatively more resilient in coming years. TIS earnings will need to meaningfully grow however as the defense industry shrinks and federal procurement initiatives constrain margins, or leverage will remain elevated. TIS' good qualifications, highly cleared workforce and relatively lean cost structure may favor bidding prospects within specialized contracting niches where intelligence, surveillance and technology investments are increasing the need for data management and analytics support.

The stable rating outlook anticipates that Sotera's pending credit facility amendment will provide covenant cushion, making the near-term liquidity profile adequate. In addition, with low capital expenditure requirements and pay-in-kind interest on the holdco subordinate note, a small amount (around $10 million) of free cash flow may be possible, adding to liquidity. Scheduled debt amortizations are only about $2 million annually until 2017. Following the Q4 term loan prepayment, the company will have about $15 million of cash on hand. The adequate liquidity gives Sotera maneuvering room to aggressively promote TIS and compete for task orders that could grow market share.

The rating on the bank credit facility debts remains B3 despite the lowered CFR. Pursuant to Moody's Loss Given Default Methodology, recovery on the bank debt claim would benefit from the expected decline in the size of that class versus total estimated claims in stress scenario. Paid-in-kind interest on the holdco subordinate note along with the term loan prepayment suggest that the holdco note would absorb loss and thereby help bank debt recovery prospects.

The rating could be downgraded if debt to EBITDA remains above 8x, if backlog declines or if the liquidity profile weakens. The rating could be upgraded if debt to EBITDA approaches the mid 6x range with funds from operations to debt of 10% or higher, and expectation of sustained adequate liquidity.

The principal methodology used in rating Sotera was the Global Aerospace and Defense Industry Methodology published in June 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Sotera Defense Solutions, Inc. ("Sotera"), headquartered in Herndon, Virginia, provides mission-critical technology-based systems, solutions and services for national security agencies and programs of the U.S. government. The annual revenue base is estimated to be approximately $350 million. The company is majority-owned by an affiliate of Ares Management LLC.

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Bruce HerskovicsAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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