-- 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
-- The stable outlook reflects our expectation credit ratios will
deteriorate but remain appropriate for the rating, pro forma for the
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.
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.
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
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
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.
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
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,
-- 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
Corporate Credit Rating B/Stable/--
$460 mil 2nd priority sr secd nts B-
Recovery Rating 5
$200 mil. conv notes CCC+
Recovery Rating 6