Business, Mid-Market & Industrial

How to Underwrite an Aerospace and Defense Supplier

Underwrite an aerospace and defense components supplier by mapping revenue to specific aircraft and defense programs, then testing sole-source positions, backlog quality and the mix of OEM versus aftermarket sales. The metrics that matter most are program concentration, backlog coverage, aftermarket revenue share, gross margin by part family, and compliance with quality and export control requirements.

What makes aerospace and defense components underwriting different

Aerospace and defense suppliers make precision parts, assemblies and components that must be qualified on specific platforms. Once a part is qualified, switching suppliers is costly and slow for the customer, which creates durable sole-source positions and pricing power, especially in the aftermarket where spare parts and repairs are sold for decades. Revenue is tied to aircraft build rates and defense program budgets, so program concentration matters. Quality certifications such as AS9100, export controls under ITAR and EAR, and, for defense work, government cost accounting and cybersecurity rules create compliance requirements. Long-term agreements with OEMs may fix prices while input costs rise, and skilled machinists and engineers are scarce.

Lenders like the long program lives and backlog but focus on program and customer concentration, the risk of OEM production rate changes or program cancellations, and the company's compliance record. They want to see diversified platforms and solid working capital management, since inventory and work in process can be large. Private equity buyers value proprietary and sole-source parts, aftermarket exposure and platforms with rising build rates, and they pursue add-ons that broaden capabilities. Equity may pay premium multiples for aftermarket-heavy proprietary businesses, while lenders still haircut concentrated program exposure.

Key metrics

Program concentration

Revenue tied to a few aircraft or defense programs exposes the supplier to build rate changes and cancellations.

Sole-source revenue share

Parts where the company is the only qualified supplier carry pricing power and stickiness.

Aftermarket revenue share

Spare parts and repairs often carry higher margins and continue as long as the fleet flies.

Backlog coverage

Firm orders relative to annual revenue show visibility, but must be tested for cancellability.

Gross margin by part family

Margins differ widely between build-to-print and proprietary parts and between OEM and aftermarket.

On-time delivery and quality escapes

OEMs score suppliers on delivery and quality, and poor scores risk losing future work.

How to underwrite it, step by step

Map revenue by part, program, customer and end market, separating OEM and aftermarket.
Identify sole-source and proprietary parts and review long-term agreements and pricing terms.
Analyze backlog by program, delivery dates and cancellation provisions.
Review AS9100 certification, customer quality scorecards and audit findings.
Review ITAR and EAR registrations, export licenses and any voluntary disclosures.
For defense work, review government contract terms, cost accounting compliance and cybersecurity requirements.
Assess machine capacity, skilled labor and capex needs.
Size debt on adjusted EBITDA with program concentration stress cases.

Due diligence checklist

Revenue by part, program and customer
Long-term agreements and purchase orders with OEMs
Backlog report with delivery schedules
Sole-source and proprietary parts list
AS9100 certificates and audit reports
Customer quality and delivery scorecards
ITAR registration and export license records
Government contracts and DCAA audit history if applicable
Cybersecurity compliance documentation
Equipment list and capacity analysis
Quality of earnings report

Key risks and mitigants

Program cancellation or reduced build rates.

Diversify across programs and stress the loss or slowdown of the largest program.

Fixed-price long-term agreements with rising costs.

Review pricing terms and escalation clauses and stress material and labor inflation.

Export control violations.

Conduct export compliance diligence and obtain representations and indemnities.

Quality escapes leading to lost qualifications.

Review quality records and corrective actions and confirm certification status.

Skilled labor shortages.

Assess workforce age, training programs and automation opportunities.

Typical financing and deal structure

Aerospace and defense suppliers are commonly financed with senior or unitranche loans from banks and private credit funds, often with a revolver to fund inventory and work in process. Larger platforms may access broadly syndicated loans. Private equity buyers frequently use rollover equity and representations and warranties insurance, with special attention to export control and government contract representations. Change of control may require customer and government notifications or consents, and foreign investment in defense suppliers may require CFIUS review. Covenants typically include leverage and fixed charge coverage tests, with add-backs for program ramp costs negotiated carefully.

Red flags

Majority of revenue tied to a single program facing budget or production uncertainty.
Unresolved export control violations or missing ITAR registration.
Declining customer quality or delivery scores.
Long-term fixed price agreements with significant cost inflation exposure.
Foreign ownership issues that could trigger government review.

Frequently asked questions

Why do aerospace suppliers command high valuations?

Qualified parts on aircraft and defense programs are difficult to replace, giving suppliers durable positions that can last for decades. Aftermarket demand for spare parts and repairs continues as long as aircraft fly, often at attractive margins. Buyers value proprietary, sole-source and aftermarket-heavy businesses because of this predictability and pricing power.

What is ITAR and why does it matter in an acquisition?

ITAR, the International Traffic in Arms Regulations, controls the export of defense articles and related technical data. Companies handling ITAR items must register and follow strict rules on access and exports. Violations can lead to significant penalties and loss of business, so buyers review compliance programs and history carefully.

What is AS9100 certification?

AS9100 is a quality management standard for aerospace suppliers based on ISO 9001 with additional aerospace requirements. Many OEMs require it for suppliers. Underwriters confirm certification status, audit results and any major nonconformities because losing certification can block a supplier from future orders. Customer-specific quality requirements often sit on top of it.

How do lenders view program concentration in aerospace suppliers?

Lenders view heavy dependence on one aircraft or defense program as a key risk because production rate cuts or cancellations can sharply reduce revenue. They analyze revenue by program, stress the loss or slowdown of the largest programs and may adjust leverage or covenants for concentrated businesses.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.