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Rating Action:

Moody's Affirms WP CPP Holdings Ratings, Assigns Caa1 to 2nd Lien Term Loan

Global Credit Research - 18 Oct 2013

Approximately $902 Million of Rated Debt Affected

New York, October 18, 2013 -- Moody's Investors Service affirmed its ratings for WP CPP Holdings, LLC, d/b/a Consolidated Precision Products (CPP), including the company's B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating (PDR) and B1 senior secured (1st lien) debt rating. Moody's also assigned a Caa1 rating to the company's new senior secured (2nd lien) Term Loan. CPP, which is majority owned by private equity firm Warburg Pincus, is in the process of completing a $172 million dividend recapitalization and partial refinancing of existing bank credit facilities following successful integration of its approximate $285 million December 2012 acquisition of Esco Corporation's Turbine Technologies Group (TTG). The rating outlook is Stable.

RATINGS RATIONALE

With proforma, annualized Moody's-adjusted Debt-to-EBITDA leverage approximating 6.5x on a run-rate basis upon closing of the dividend recapitalization and related financing transactions, CPP will again be weakly positioned at the B2 rating level. CPP does, however, have a well-established track record of revenue and margin stability, supported in part by its sole-source position on a significant number of products and very high customer retention rates. As a result, Moody's believes that CPP will be able to effect significant deleveraging over the forward period as EBITDA grows and debt is repaid on both a mandatory and voluntary basis. The company should continue to benefit from its incumbent supplier positions given an expected continuation of attractive commercial aerospace market conditions, partly offset by depressed conditions in the defense industry wherein a smaller albeit still significant market presence is maintained.

The ratings subsequently incorporate Moody's expectation that high and growing aircraft delivery forecasts by leading original equipment manufacturers and airframe builders more broadly will continue to drive demand for CPP products, which in turn should support continued earnings growth, cash flow generation and balance sheet deleveraging to levels more appropriate for the assigned rating category. The B2 CFR reflects CPP's small scale both on an absolute basis and relative to competitors in the casting industry, its exposure to reduced military outlays at the US Department of Defense, and an elevated level of deemed financial risk stemming from aggressive fiscal policies as evidenced by the dividend recapitalization. These risks are somewhat offset by CPP's relatively stable revenue and margin profile, customer and platform diversification, sole-source position with respect to many products and customers, and good liquidity profile.

The following is a summary of today's rating actions and Moody's ratings:

Issuer: WP CPP Holdings, LLC

Affirmations:

CFR: B2

PDR: B2-PD

Existing $537 million (increased from $415 million) Senior Secured 1st Lien Term Loan B due 2019: B1 LGD3 36% (from LGD3 35%)

Existing $125 million (increased from $100 million) Senior Secured 1st Lien Revolving Credit Facility due 2017: B1 LGD3 36% (from LGD3 35%)

Assignments:

New $240 million Senior Secured 2nd lien Term Loan due 2021: Caa1 LGD5 88%

Withdrawals (upon successful completion of the dividend recapitalization financing transactions):

Existing $185 million Senior Secured 2nd lien Term Loan due 2020: Caa1 LGD5 86%

The stable rating outlook reflects Moody's expectation that strength in the company's commercial aerospace and industrial gas turbine markets will offset any potential weakness in military end-markets. Moreover, Moody's expects that the company will be able to effect a fairly quick deleveraging of its balance sheet, similar to what was evidenced after the TTG acquisition over the past year, with earnings growth and prepayment of 1st lien term debt with excess free cash flow allowing for at least one-half and up to one full turn of leverage reduction by the end of 2014.

Moody's anticipates that CPP will maintain good liquidity over the rating horizon. Although Moody's expects positive free cash flow as a result of CPP's reasonably high and stable margins coupled with modest capital expenditure requirements, excess free cash flows are expected to be dedicated to both mandatory and voluntary prepayment of term debt and will subsequently not enhance future liquidity. CPP will have full availability under its $125 million (upsized from $100 million at present) revolving credit facility, which is covenant-lite and does not mature until 2017. Moody's does not expect that the company will draw on its revolver at levels sufficient to trigger the springing fixed charge coverage test as stipulated in the governing credit agreement. Alternative liquidity is limited given the predominantly all-asset pledge to the company's various creditors.

The B1 ratings for the 1st lien term loan and revolver reflect their seniority position in the consolidated capital structure, including the benefits of predominantly all-asset liens and both upstream and downstream guarantees. The Caa1 rating for the 2nd lien term loan reflects its junior position relative to the aforementioned 1st lien lenders, with an explicit 2nd lien status albeit identical guarantees as provided to 1st lien lenders.

The ratings are unlikely to be upgraded prior to a material reduction in financial risk, as evidenced for example by Moody's-adjusted Debt-to-EBITDA leverage of around 4.5x or lower on sustained basis. Consideration for any prospective ratings upgrade would also require a strengthening of margins and a demonstrated ability to generate consistently strong cash flows, along with maintenance of a good liquidity profile. A rating downgrade would likely occur if leverage is expected to remain above 6x for an extended period, particularly if another large dividend distribution is contemplated in short order and prior to leverage achieving an expected sub-5x range as earnings grow and excess free cash flow is applied towards debt reduction.

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, majority owned by private equity firm Warburg Pincus and headquartered in Cleveland, Ohio, is a castings manufacturer of engineered components and sub-assemblies for the commercial aerospace, military and defense and energy markets. The company generated approximately $500 million of revenue for the twelve-month period ended September 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Russell D Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael 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 Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms WP CPP Holdings Ratings, Assigns Caa1 to 2nd Lien Term Loan
No Related Data.

 

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