WP CPP Holdings, LLC -- Moody's assigns B2 CFR to CPP; Outlook stable
New York, December 07, 2012 -- Moody's Investors Service assigned a B2 corporate family rating to WP CPP Holdings, LLC (CPP), along with B1 ratings for its proposed first lien bank credit facilities and a Caa1 rating for its proposed second lien term loan. The rating outlook is stable.
Proceeds from the proposed financing and an equity contribution from CPP's sponsor, Warburg Pincus LLC, will be used to refinance existing debt and pay for the acquisition of the Turbine Technologies Group (TTG) from ESCO Corporation.
The following ratings were assigned to CPP (subject to review of final documentation):
B2 corporate family rating (CFR);
B2 probability of default rating;
B1 (LGD3, 35%) rating for the $100 million senior secured revolving credit facility due 2017;
B1 (LGD3, 35%) rating for the $415 million senior secured term loan B due 2019; and
Caa1 (LGD5, 86%) rating for the $185 million senior secured second lien term loan due 2020.
With proforma leverage just above 6.0x at close of the TTG acquisition, on a Moody's adjusted basis, CPP is weakly positioned at the B2 rating level. The rating incorporates Moody's expectation that high aircraft delivery forecasts by airframe builders will drive demand for CPP's and TTG's products over the next 12-18 months, which should support earnings growth, cash flow generation and balance sheet deleveraging to a more appropriate level for the rating.
The B2 CFR reflects CPP's small scale relative to competitors, exposure to potential cuts in military spending by the US Department of Defense, a sector that accounts for roughly a quarter of proforma 2012 sales, and an elevated level of integration risk following the TTG acquisition, the largest deal in company history. These factors are balanced against CPP's consistently high margins, its sole source position with many customers, a diversified customer base, limited exposure to any one aircraft platform in its aerospace business (50% of proforma 2012 sales), and a good liquidity profile.
Moody's expects the acquisition of TTG to add scale to CPP's castings manufacturing capabilities and enhance customer, end-market and product diversification. Further, we expect integration efforts to be focused mainly on back-office redundancies, and that TTG's margins, which are meaningfully lower than CPP's, will trend upwards as integration efforts are completed.
The stable outlook is prospective in that it anticipates meaningful deleveraging will occur over the next 12-18 months and that CPP will be successful in managing its integration of TTG. Further, the stable outlook reflects our view that strength in commercial aerospace, industrial gas turbines and energy end-markets will more than offset potential weakness in military business over this period.
At close, Moody's expects CPP to maintain a good liquidity profile benefiting from modest annual cash flow generation and a sizeable, undrawn $100 million revolver that doesn't matures until 2017. We expect capital spending to be manageable and do not expect integration plans to consume much cash. The deal is covenant-lite, with no covenants unless revolver borrowings reach $20 million. At $20 million, the company would be required to meet a net first lien leverage covenant, although we note considerable headroom even if this covenant becomes effective. We do not, however, anticipate that the company will require $20 million of borrowings over the next year.
The B1 rating on the term loan and revolver reflect their seniority position in the consolidated capital structure, including the benefits of all-asset liens and both upstream and downstream guarantees. The Caa1 rating on the second lien loans reflects their junior position relative to the aforementioned first lien lenders, with an explicit second lien status and the same guarantees as provided to first lien lenders.
The ratings are unlikely to be upgraded prior to the completion of the TTG integration efforts and a reduction in leverage to around 4.5x on sustainable basis. An upgrade would also require strengthening of margins and a demonstrated ability to generate consistently strong cash flows. A rating downgrade would likely occur if integration efforts were to be more challenging than initially anticipated and margin improvements at TTG are prolonged, with resultant leverage approaching 6.5x.
The principal methodology used in rating CPP was the Global Aerospace and Defense Industry Methodology published in June 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
CPP, headquartered in Pomona CA, is a castings manufacturer of engineered components and sub-assemblies for the commercial aerospace military and defense and energy markets. TTG is a supplier investment cast components provider for the aerospace, power generation, M&D, and industrial end-markets. Combined revenues are expected to total roughly $485 million for 2012.
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Brian GrieserAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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