TEXT-S&P assigns Firth Rixson (Cyprus) 'B' rating
Overview -- Firth Rixson is entering into a new credit facility to refinance existing debt and, with the proceeds from an equity infusion, provide liquidity to support investments in new capacity and capabilities. -- We are assigning our 'B' corporate credit rating to Firth Rixson (Cyprus) Ltd. -- At the same time, we are assigning our 'B+' issue rating and '2' recovery rating to the proposed first-lien credit facility that two indirect subsidiaries, JFB Firth Rixson Inc. and FR Acquisitions Corp. (Europe) Ltd. U.K., will issue. -- The stable outlook reflects our expectation that credit ratios will remain quite weak but improve gradually over the next year mostly as a result of earnings growth as high capital expenditures will constrain free cash flow. Rating Action On Nov. 8, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to Firth Rixson (Cyprus) Ltd. The outlook is stable. At the same time, we are assigning our 'B+' issue rating and '2' recovery rating to the proposed $800 million secured credit facility, which consists of a $120 million revolver and a $680 million term loan. The borrowers on the new facility will be indirect subsidiaries, JFB Firth Rixson Inc. and FR Acquisitions Corp. (Europe) Ltd. U.K. The '2' recovery rating indicates our expectation of substantial (70%-90%) recovery in the event of payment default. Rationale Our ratings on Firth Rixson reflect our expectations that leverage (debt to EBITDA) will remain high after the proposed transaction, with only modest improvement likely in the next 12 months because of limited free cash flow. We believe revenues and earnings will show solid growth over the next year because of the strength in commercial aerospace market and the contribution from new projects. We assess the company's business risk profile as "fair," reflecting its position as a leading provider of rings and forgings for aircraft engines, good customer and geographic diversity, high barriers to entry, and efficient operations. We assess the company's financial risk profile as "highly leveraged" based on the company's high debt leverage and very aggressive financial policy. We assess liquidity as "adequate" under our criteria. The company, which is majority owned by private equity firm Oak Hill Capital Partners, plans to use the proceeds from the new facility and a $150 million equity infusion to refinance existing debt and provide liquidity to support capital projects to expand capacity and new forging capabilities, as well as buyout some operating leases. Debt to EBITDA will remain essentially unchanged after the proposed transaction, as the balance sheet will be unchanged, but it is very high at more than 8.5x. Part of the reason the leverage is so high is that a portion of what the company classifies as equity, including the new investment, is in the form of preferred stock and proceeds from holdco notes, both of which have interest that is paid in kind (PIK). We consider the preferred stock as debt, as it is owned primarily by Oak Hill. If these instruments were considered equity, debt to EBITDA would still be high at above 6x. Other fully adjusted credit protection measures will also be weak with funds from operations (FFO) to debt below 10% and EBITDA interest coverage of 1x. We expect modest improvement over the next 12-24 months because of growing earnings, primarily as a result of the strength in the commercial aerospace market. However, we don't expect material debt paydown in that period, as free cash flow will be a use of more than GBP30 million in fiscal 2013 (ended Sept. 30, 2013) and about breakeven in fiscal 2014 because of large capital expenditures. Firth Rixson is a leading global supplier of highly engineered rings, forgings, and specialist metal products primarily to the aerospace market (70% of sales), as well as industrial gas turbine and marine (9%), off-highway (8%), oil and gas (3%), mining (2%), and other markets (8%). The company operates in three segments: rings (57% of sales), which manufactures complex seamless and flash-butt welded rings in various metals; forgings (27%), which manufactures nickel, titanium, and steel closed die and extrusion forgings; and metals (16%), which produces cast and wrought superalloys, as well as rolled and forged long products. Firth Rixson has operations in the U.S., U.K., Hungary, and China. For the aerospace market, the company primarily provides products for aircraft engines used on commercial widebodies (39% of aerospace sales) and narrowbodies (34%), as well as military aircraft (16%) and business jets (11%). The commercial aerospace market is currently in a cyclical upturn, and the major aircraft and engine manufacturers are increasing production significantly to work down huge order backlogs. The company's customer base is fairly well diversified for an aerospace supplier, with the top 10 customers comprising about 40% of sales. The three largest customers are the leading aircraft engine manufacturers, General Electric, Pratt & Whitney, and Rolls Royce, all at less than 10% of sales each. Firth Rixson has a 60% share of the global market for seamless ring forgings used in aircraft engines and a leading position in manufacturing disks used in small aircraft engines. Its primary competitor in rings and forgings is Precision Castparts Corp. (PCC, A-/Stable/A-1), as well as some smaller competitors. The industry has fairly high barriers to entry because of the high capital costs to acquire or build forges, which can cost tens of millions of dollars each. In addition, 70% of the company's aerospace work is under long-term agreements, providing near-term revenue visibility. However, this can also limit the ability of the company to gain new work on existing engines, unless the incumbent is not performing, making gaining on positions on new engines vital to expanding market share. Firth Rixson has positions on all of the major engines for popular narrowbody and widebody aircraft, including the new Boeing 787. The company is investing a significant amount to expand its forging capabilities and capacity for producing disks for larger engines and other products. The company has efficient operations, and its EBITDA margins are fairly high at about 18%. However, this is much lower than the 25% margins in the forging division of PCC. Liquidity We believe that liquidity will be "adequate," pro forma for the proposed transaction. We expect sources of liquidity to exceed uses by at least 1.2x in the next 12 months and that sources will exceed uses even if EBITDA were to decline by 15%, the minimum required levels under our criteria for an adequate designation. We expect the company to have about GBP90 million of cash after the close of the proposed transaction, as well as access to a $120 million undrawn revolver. We expect free cash flow to be a use of more than GBP30 million in fiscal 2013 and about breakeven in fiscal 2014 because of large capital expenditures. Debt maturities are modest the next few years, primarily the $6.8 million per year of amortization on the new term loan. The new facility will have covenants requiring maximum leverage and minimum interest coverage. Levels have not yet been set, but we expect at least 15%-20% cushion to our projected EBITDA. Recovery analysis We rate the new credit facility 'B+', one notch above the corporate credit rating. The '2' recovery rating indicates our expectation of substantial (70%-90%) recovery in the event of payment default. The facility is composed of a $120 million revolver due 2016 and a $680 million term loan that matures in 2017. The borrowers on the new facility will be indirect subsidiaries, JFB Firth Rixson Inc. and FR Acquisitions Corp. (Europe) Ltd. U.K. We estimated a default scenario emergence enterprise value of $600 million, which represents a 5x multiple of a stressed EBITDA of $120 million. This represents a 35% decline in EBTIDA from current levels. We assumed that the company would have six months of accrued prepetition interest on all debt outstanding at default. We also estimated administrative expenses such as professional fees and costs of bankruptcy totaling 5% of the gross enterprise value. Under our simulated default scenario, the company would have senior secured debt claims of about $773 million at the time of default. We reduced our net enterprise value of $570 million by $5 million to account capital leases, which we consider priority claims. We also reduced the estimated foreign net enterprise value to account for an approximately $16 million (GBP10 million) in a foreign credit line. We allocated the remaining domestic and foreign residual value to senior secured claims, which results in an expectation of substantial (at the low end of 70%-90%) recovery for senior secured lenders. Outlook The outlook is stable. Although revenues and earnings are likely to see solid growth because of the strength of the commercial aerospace market and new projects coming on line, credit measure are likely to remain weak and only improve modestly over the next 12-24 months, as large capital investments limit free cash flow, and therefore debt reduction. We do not expect to raise the ratings in the next 12 months, but we could if cash flow and debt reduction is greater than we expect, resulting in debt to EBITDA (including the holdco notes and preferred stock treated as debt) below 5.5x. We are also unlikely to lower the ratings but could if earnings and cash flow do not improve as we expect, or if adverse developments cause us to revise our liquidity assessment to "less than adequate." Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Standard & Poor's Standardizes Liquidity Descriptors for Global Corporate Issuers, July 2, 2010 -- Key Credit Factors: Methodology and Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009 Ratings List New Rating; Stable Outlook Firth Rixson (Cyprus) Ltd. Corporate Credit Rating B/Stable/-- New Rating JFB Firth Rixson Inc. FR Acquisition Corporation (Europe) Ltd. U.K. Senior Secured $120 mil revolving credit fac due 2017 B+ Recovery Rating 2 $680 mil term B bank ln due 2017 B+ Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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