KAL Capital 2024 Q1 Newsletter

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Dear Friends,

We are pleased to announce three new transactions in the first quarter that are described in greater detail on the following slides. We are immensely proud of the momentum in the practice, particularly given that these transactions each represent a key KAL Capital focus area including Maintenance, Repair, Overhaul (“MRO”), surface treatments, and the US Navy supply-chain.

From a capital markets perspective, we have unequivocally witnessed an improvement as each of our active projects has received a robust response from both strategic and private equity buyers. Most acutely, we have seen risk appetite in the debt capital markets improve markedly and while all-in rates remain high, availability (Debt/EBITDA) has recovered after a precipitous decline during the second half of 2022. Unfortunately, the equity capital markets for A&D names have not rallied in-line with the broader market. This is primarily related to the major challenges at Boeing (-33% YTD) and the ripple effect of an on-going FAA investigation.

From a supply-chain perspective, challenges at Boeing commercial have become a constant source of concern with limited odds of near-term relief. After leaning on its supply-chain to continuously reduce cost without sacrificing quality or delivery, it now appears that Boeing should have spent more time and energy understanding its own manufacturing processes and controls. There is now little doubt that Airbus has emerged as the winner in the battle for the all important narrowbody market. That said, airlines do not have the option of waiting nearly a decade for an A320 delivery slot, and in many ways the B737MAX is “too big to fail”. For M&A processes, we are being conservative in how we forecast Boeing production ramps to align with buyers who are still very much looking for high-quality assets in the sector.

The defense sector has seen significant news flow so far this year. First, the DoD Budget was finally appropriated in late March despite the fiscal year of the government beginning six-months earlier. This dysfunction stands in the way of important next-generation platforms and effectively reduces total procurement spending. Despite an era of global rearmament, the DoD Budget is declining in real-terms (adjusted for inflation) and the threat of a global conflict remains omnipresent as illustrated by Iran’s unprecedented direct attack on Israel. The nature of the attack serves to inform the future of combat whereby a high number of attritable UAVs are used in a “swarm” to overwhelm air combat defense. This presents a new set of challenges and a mismatch in cost of defense vs. attack (Patriot Missile vs. near-hobby drone). The DoD and its funding mechanisms are responding to this evolving landscape, and we have seen an unprecedented variety of new programs searching for next-generation solutions.


Trevor Bohn & Ryan Murphy