Overview -- WP CPP Holdings LLC is entering into a new credit facility to refinance existing debt and to acquire ESCO's Turbine Technologies Group. -- We are assigning our 'B' corporate credit rating to the company. -- At the same time, we are assigning our 'B' issue rating and '3' recovery rating to the proposed first-lien revolver and term loan B, and 'CCC+' issue rating and '6' recovery to the second-lien term loan. -- The stable outlook reflects our expectation that credit ratios will improve gradually over the next year as a result of earnings growth, debt reduction, and margin improvement. Rating Action On Dec. 6, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to WP CPP Holdings LLC (CPP). The outlook is stable. At the same time, we are assigning our 'B' issue rating and '3' recovery rating to the proposed $515 million secured first-lien credit facility, which consists of a $100 million revolver and a $415 million term loan. The '3' recovery rating indicates our expectation of substantial (50%-70%) recovery in the event of payment default. For the $185 million second-lien term loan, we are assigning our 'CCC+' issue rating and '6' recovery rating. Rationale Our ratings on CPP reflect our expectations that leverage (debt to EBITDA), although initially high after the proposed transaction, will improve steadily over the next 12 months because of earnings growth and debt reduction from solid free cash flows. We believe revenues and earnings will show solid growth over the next year because of the strength in commercial aerospace market, operational efficiency initiatives, and contributions from Turbine Technologies Group (TTG, not rated). We assess the company's business risk profile as "fair," reflecting its position as a leading provider of sand and investment castings for commercial aerospace and other markets (although it is much smaller than some of its main competitors), relatively good customer and program 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 owned by private equity firm Warburg Pincus, plans to use the proceeds from the new facility and a $47 million equity infusion to refinance existing debt and fund the acquisition of TTG. CPP is acquiring TTG, a manufacturer of superalloy precision investment cast components used predominantly in the aerospace and power generation markets, from ESCO Corp. (not rated). Credit measures will initially be weak, with pro forma debt to EBITDA above 6x, funds from operations (FFO) to debt below 10%, and EBITDA interest coverage of 2.2x. However, we expect modest improvement over the next 12 months because of growing earnings, as a result of the strength in the commercial aerospace market and efforts to improve margins as well as debt reduction from free cash flows. In 2013, we expect debt to EBITDA to decline to 5x-5.5x and FFO to debt to improve to 10%-15%, barring further debt-financed acquisitions. CPP manufactures sand and investment castings for the commercial aerospace (51% of sales pro forma for the TTG acquisition), military (39%), and energy/industrial markets (10%). The company produces components for aircraft engines, aerostructures, industrial gas turbines, missiles, nuclear and other pump casings, and impellers. CPP has operations in the U.S., France, and Mexico. The acquisition of TTG will broaden CPP's product scope and depth by introducing aerospace components used in the "hot section" of aircraft engines (i.e. blades and vanes), as well as increasing its content on industrial gas turbines. 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. Although defense spending is likely to be flat to declining for the foreseeable future, CPP's products are used in the aftermarket, including rotating parts that wear quickly, which could see more stable funding levels. The energy market has favorable prospects as the price of natural gas, which is currently more competitive in relation to coal, could result in increased demand for industrial gas turbines. CPP has relatively good program diversity for the size of the company. The company has product content on the Boeing 737, 747-8 and 777, as well as Airbus' A320. CPP is also represented on the 787 and A380, but content on these platforms is small compared with the other programs because of low production rates and shipset values. Revenues from the 787 should increase as production rises. Military programs on which CPP has content include the C-17, F-15, F-18, and F-22, which are all mature programs that are likely to end production in the next few years. However, the company sells parts into the aftermarket, so its parts will be needed for many years after production of new planes ends. The company's customer base is relatively well diversified for an aerospace supplier, and its top 10 customers comprise about 39% of sales and the largest, General Electric, less than 10%. Although CPP is one of the leading manufacturers of castings in the U.S., its two main competitors, Precision Castparts and Alcoa, are both much larger. In addition, there are a number of smaller competitors that have more limited capabilities. The industry has high barriers to entry because of the complexity associated with the manufacturing process, Federal Aviation Administration certification requirements, and long lead times for customer acquisitions. The company has efficient operations, as evidenced by solid EBITDA margins. 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 only minimal cash balances after the close of the proposed transaction, but access to a $100 million undrawn revolver. We expect the company to generate more than $35 million of annual free cash flow for the next two years. Debt maturities are minimal over the next few years, primarily $4.2 million per year of amortization on the new first-lien term loan. The only financial covenant limits first-lien net leverage (as defined), but only if more than 20% of the revolver is drawn. The covenant starts at 5.75x and steps down to 4.5x in December 2017. Recovery analysis Please see the recovery report to be published shortly on RatingsDirect. Outlook The outlook is stable. Revenues and earnings should see solid growth over the next 12 months as a result of the strength in the commercial aerospace market and efforts to reduce costs and improve pricing. Higher earnings and debt reduction using excess free cash flow should result in steadily improving credit ratios. We do not expect to raise the ratings in the next 12 months but could do so if cash flow and debt reduction is greater than we expect, resulting in debt to EBITDA below 5x and FFO to debt above 15%. We are less likely to lower the ratings, but we could do so if the commercial aerospace market weakens, or if debt-financed acquisitions or dividends result in debt to EBITDA above 7x or FFO to debt below 8%. 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 WP CPP Holdings LLC Corporate Credit Rating B/Stable/-- New Ratings WP CPP Holdings LLC Senior Secured $100 mil revolver due 2017 B Recovery Rating 3 $415 mil term B ln due 2019 B Recovery Rating 3 $185 mil 2nd lien ln due 2020 CCC+ Recovery Rating 6 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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