TEXT-S&P assigns Firth Rixson (Cyprus) 'B' rating

Thu Nov 8, 2012 5:14pm EST

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                  


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by this rating action can be found on Standard & Poor's public Web site at 
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