TEXT-S&P assigns WP CPP Holdings 'B' rating

Thu Dec 6, 2012 5:42pm EST

Related Topics

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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