Standard & Poor’s Global Ratings announced a downgrade of Karman Space and Defense’s senior secured debt rating to B+ from BB- after the company agreed to acquire Seemann Composites LLC and Material Sciences for approximately $225 million. Alongside the rating revision, S&P adjusted the recovery rating to 3 from 2, indicating an estimated recovery of 65% compared to the previous 70%, thereby signaling a meaningful but slightly reduced expected return for creditors in the event of default.
To finance the acquisition, Karman intends to increase the size of its existing $506 million term loan B by up to $220 million. S&P noted that this funding strategy will postpone the anticipated improvement in Karman's credit metrics over the near term, reflecting the increased leverage.
The acquisitions strategically broaden Karman’s footprint in niche defense market segments, particularly given Seemann Composites and Material Sciences' specialization in resin and compound products tailored for maritime surface and subsurface applications. The U.S. Navy has been a longstanding client of the acquired entities, underscoring the defense market relevance of the deal.
S&P expects the acquired companies' sole-source positions within their markets to align their profitability closely with Karman's existing base profit margins. However, S&P also cautioned that integration and transaction-related expenses could put downward pressure on margins in 2026.
Despite incurring higher debt from the acquisition, S&P forecasts Karman’s debt to EBITDA ratio will range between 3.75 and 4.25 times in 2026 and 2027, with funds from operations to debt maintaining a solid 12% to 15% ratio. This indicates ongoing capacity to service debt despite the acquisition’s impact.
Reflecting confidence in sustained defense sector demand, the rating agency maintained a stable outlook on Karman. It highlighted that robust military spending driven by global conflict dynamics is expected to underpin EBITDA growth and help counterbalance the leverage increase.
This transaction marks the largest acquisition in Karman’s history. Nevertheless, S&P does not anticipate significant integration challenges based on the company’s track record of effectively incorporating smaller scale acquisitions.
Overall, while the acquisition introduces greater financial leverage and near-term integration costs, it strategically positions Karman within specialized maritime defense materials, supported by solid defense demand outlooks.
S&P Global Ratings has downgraded Karman Space and Defense’s senior secured debt rating from BB- to B+, reflecting the firm’s recent $225 million acquisition of Seemann Composites LLC and Material Sciences. The acquisition is expected to enhance Karman's market position in defense specialty materials but will delay improvements in credit metrics due to increased leverage. Despite higher debt levels, S&P projects stable cash flow metrics supported by defense sector demand and maintained a stable outlook on the company’s ratings.
Key Points
- S&P downgraded Karman Space and Defense's senior secured debt rating from BB- to B+ following its $225 million acquisition of Seemann Composites LLC and Material Sciences.
- The acquisition will broaden Karman's presence in maritime and niche defense markets, with the U.S. Navy among the key customers of the acquired companies.
- Despite higher leverage from upsizing the term loan by up to $220 million, S&P projects stable EBITDA and cash flow ratios through 2027, maintaining a stable outlook due to robust defense sector demand.
Risks
- The increase in debt to finance the acquisition delays near-term credit metric improvements, introducing financial risk related to leverage.
- Transaction and integration costs associated with the acquisitions may negatively impact profit margins in 2026.
- Recovery rating downgrade suggests lowered expected creditor recovery in a potential default scenario, indicating increased default risk for lenders.