TEXT - S&P rates GenCorp notes 'B-'
Overview -- GenCorp announced plans to issue $460 million in new senior secured notes to largely fund the previously announced $550 million acquisition of Pratt & Whitney Rocketdyne from United Technologies. -- We are assigning a 'B-' issue rating to the new secured notes with a '5' recovery rating and affirming our 'CCC+' issue rating on GenCorp's outstanding $200 million in convertible notes. -- Our 'B' corporate credit rating and stable outlook on the company are unchanged. -- The stable outlook reflects our expectation credit ratios will deteriorate but remain appropriate for the rating, pro forma for the acquisition. Rating Action On Jan. 14, 2013, Standard & Poor's Ratings Services assigned its 'B-' issue-level rating to GenCorp Inc.'s proposed $460 million second-lien secured notes with a '5' recovery rating, indicating expectations of modest (10%-30%) recovery in a simulated payment default scenario. At the same time, we affirmed our existing 'CCC+' issue-level rating on GenCorp's outstanding $200 million in convertible notes, which carry a recovery rating of '6', indicating negligible (0%-10%) recovery in the event of a payment default. Rationale GenCorp has indicated that it will use proceeds from the proposed debt issuance along with cash on hand to fund the $550 million purchase of Pratt & Whitney Rocketdyne (PWR; not rated) from United Technologies Corp. (A/Stable/A-1). The acquisition is pending regulatory approval, which we expect in the first half of 2013. The additional debt will likely result in a modest deterioration in credit protection measures, with pro forma funds from operations (FFO) to debt declining to about 11% from 17%. We do not expect material improvement in credit metrics over the next 12 months because of declining defense and NASA budgets. We revised our financial risk profile assessment to "highly leveraged" from "aggressive" in December 2012. We believe the improvement in market position and diversity offsets higher debt. We revised our business risk profile assessment to "fair" from "weak" in December 2012 as well. Liquidity We expect GenCorp's liquidity will remain "adequate" pro forma for the proposed acquisition. We believe sources of liquidity will exceed uses by at least 1.2x over the next 12 months and sources would exceed uses even if EBITDA were to decline by 15%. These are minimum requirements for an "adequate" designation. GenCorp had $156 million of cash as of Aug. 31, 2012. Pro forma for the acquisition, we expect cash of about $80 million. The company also has $105 million of availability under its $150 million revolver due 2016 (net of letters of credit) as of Aug. 31, 2012. We expect free cash flow to be roughly break-even in 2013 because of unusually high levels of capital spending to implement an enterprise resource planning system and PWR's ongoing plant consolidation. Beyond 2013, we expect significant improvement in cash flow as capital spending levels normalize. Although the company has a sizeable pension liability, we believe required cash funding will be minimal over the next 12 months. The credit agreement allows for the netting of up to $100 million in cash in calculating covenant ratios, as long as there aren't any drawings on the revolving credit facility. As of Aug. 31, 2012, the company was comfortably in compliance with its covenants, which include an interest coverage ratio (5.64x actual, compared with the required minimum of 2.4x) and a leverage ratio (1.32x compared with the allowed maximum of 3.5x). Substantial real estate holdings could bolster liquidity over the longer term. However, given current market conditions, we don't expect significant real estate sales over the coming year. Recovery analysis Our issue rating on the company's $460 million senior secured notes is 'B-' and the recovery rating is '5', indicating expectations of modest (10%-30%) recovery in a payment default scenario. We rate the existing $200 million convertible subordinated debt 'CCC+' (two notches lower than the corporate credit rating), and the recovery rating is '6', indicating that lenders can expect negligible (0-10%) recovery in a payment default scenario. For the complete recovery analysis please see our report on RatingsDirect to be published shortly. Outlook The outlook is stable. We expect credit ratios to deteriorate but remain appropriate for the rating, pro forma for the acquisition and likely pressure on the Department of Defense and NASA funding. We could lower the rating if cuts to GenCorp's key programs or integration issues result in earnings declining by more than we anticipate, such that debt to EBITDA rises above 6.5x (before adjusting for pension recoverability). Although unlikely, we could raise the rating over the next year if debt to EBITDA, which is about 5x on a pro forma basis, falls below 4.5x for a sustained period, potentially because of debt reduction. In the event that the acquisition is not completed because of regulatory or other issues, we would likely affirm the ratings and maintain the stable outlook. We revised the outlook to positive in April 2012 before the acquisition was announced. While the company has taken steps to improve profitability in recent years, we are unlikely to raise the rating at this time because of substantial uncertainty surrounding the federal budget. Related Criteria And Research -- GenCorp Inc. 'B' Rating Removed From CreditWatch Developing; Outlook Stable, Dec. 19, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List GenCorp Inc. Corporate Credit Rating B/Stable/-- New Rating GenCorp Inc. Senior Secured $460 mil 2nd priority sr secd nts B- Recovery Rating 5 Ratings Affirmed GenCorp Inc. Subordinated $200 mil. conv notes CCC+ Recovery Rating 6
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