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Rating Action:

Moody's Assigns A2 Ratings to Proposed Precision Castparts Notes

01 Jun 2015

Approximately $2 to $2.5 Billion of Rated Debt Affected

New York, June 01, 2015 -- Moody's Investors Service assigned A2 ratings to the proposed debt issuance by Precision Castparts Corp. (PCP), including new senior unsecured notes due 2020, 2025, 2035 and 2045 totaling an expected $2 to $2.5 billion in aggregate. Existing ratings for the company remain unchanged, including the A2 senior unsecured debt rating and P-1 short term commercial paper rating. Net proceeds from the offering will be used to pay down commercial paper, refinance near-term maturities totaling $500 million and for general corporate purposes, which may include acquisitions and share repurchases.

"Like other large corporates, Precision Castparts is opportunistically accessing what continues to be very attractive, issuer-friendly capital markets to term out heavily drawn short-term commercial paper borrowings and refinance near-term debt maturities," says Russell Solomon, Senior Vice President and Moody's lead analyst for the company. "Although the balance sheet looks to be more levered proforma for the offerings and in consideration of both ongoing active perusal of acquisition candidates and stepped-up share repurchase activity, expectations of consistently solid earnings growth, strong and improving profitability and sizeable free cash flows continue to underpin a very creditworthy profile in support of the assigned A2 ratings," added Solomon.

RATINGS RATIONALE

The A2 rating broadly reflects Precision Castparts' (PCP) leading position within its sector, strong operating performance and cash flow generation, and relatively modest albeit growing financial leverage. PCP enjoys strong operating margins reflecting the company's efficient manufacturing and increasingly vertically integrated, advanced metal forming and processing technologies. PCP's manufacturing efficiencies coupled with substantial forthcoming production ramp-ups in both widebody and narrowbody aircraft programs are expected to yield meaningful volume expansion. Manufacturing processes frequently involve highly specialized, capital intensive equipment that give rise to high barriers to entry and significant switching costs, which in turn serve to further solidify important customer relationships. Operating efficiency coupled with high capacity utilization and effective pass-through of metal costs have sustained high operating margins for the company that are expected to persist.

With PCP's strong cash generating ability the company seeks to actively deploy capital for acquisitions. Almost $8 billion has been spent on both large and small acquisitions over the last three years, but a recent slow-down in the number of viable and cost effective opportunities coupled with a very modest dividend payout has resulted in a considerable ratcheting up of share repurchase activity of late. The board recently authorized an additional $2 billion of share repurchases that are expected to be completed over the next 12-to-18 months. In conjunction with about $1.5-to-$2 billion of prospective acquisitions this would well exceed internal sources of liquidity and in aggregate implies a more permanent leveraging of the company's balance sheet, certainly relative to more modestly levered levels of the recent past. We expect the historical trend of capital being allocated for acquisitions and share repurchases at levels that outpace free cash flow and are funded by incremental debt issuance to continue, albeit not so aggressively that rating stability is jeopardized. Moody's adjusted Debt-to-EBITDA will likely rise to about 1.5 times or modestly higher over the balance of fiscal year 2016, implicitly consuming much of the previously embedded financial flexibility that the company has historically enjoyed to accommodate opportunistic transactions at the current rating level.

The stable outlook considers that performance should remain robust as aerospace and power industry fundamentals improve over the forward rating horizon. Outlook stability is further supported by the high degree of visibility afforded by the company's material order book, as well as its demonstrated strong cash flow generating ability and good liquidity provisions.

WHAT COULD CHANGE THE RATING UP

Higher ratings are not envisioned at this time. Nonetheless, should key metrics such as Debt-to-EBITDA of less than 1.25 times, EBIT-to-Interest greater than 15 times, and Free Cash Flow-to-Debt above 25% be sustained through the cycle and still accommodate the company's acquisition strategy, consideration for a prospective upgrade could be warranted.

WHAT COULD CHANGE THE RATING DOWN

Should liquidity be strained and integration challenges become evident from past and/or prospective acquisitions, operating margins fall below 15%, Retained Cash Flow-to-Net Debt decline to under 30%, or Debt-to-EBITDA rise above 2 times for prolonged periods, lower ratings could ensue.

The principal methodology used in these ratings was Global Aerospace and Defense Industry published in April 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Precision Castparts Corp. produces castings, forgings, fasteners and other airframe products for aerospace, power generation, oil and gas and general industrial applications. The company maintains its headquarters in Portland, Oregon. Annual revenue approximates $10 billion.

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

Robert P Jankowitz
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 Assigns A2 Ratings to Proposed Precision Castparts Notes
No Related Data.
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