DCR Initiates Debt Rating for GenCorp Inc.
6 January 1999
DCR Initiates Debt Rating for GenCorp Inc.
CHICAGO, Jan. 6 -- Duff & Phelps Credit Rating Co. (DCR) has
initiated rating coverage of GenCorp Inc. with a rating of 'BBB-'
(Triple-B-Minus) for the company's senior unsecured debt obligations. The
rating has also been placed on Rating Watch--Uncertain following the company's
decision to split its operations into two separate publicly traded entities.
This rating action will affect approximately $370 million of outstanding debt.
In December 1998, the company announced its plans to spin-off its
Performance Chemicals and Decorative & Building Products businesses to GenCorp
shareholders as a separate publicly traded polymer company. GenCorp would
continue to operate in two core segments, aerospace, defense and fine
chemicals, and automotive Vehicle Sealing. DCR will continue to closely
monitor the situation and intends to meet with management in order to complete
a thorough review of the transaction and to evaluate the company's financial
objectives. However, the expected lack of diversification associated with the
individual entities and the uncertainty regarding the details of various key
issues has resulted in the Rating Watch--Uncertain designation. The exact
capital structure of the new entities along with their anticipated cash flows
and the priorities for the use of cash will need to be analyzed in order to
assess the impact from a debt service perspective.
Collectively, GenCorp's rating is supported by the company's improved
business mix, its solid market position in a majority of its business segments
and its competitive cost structure. Over the last five years, management has
successfully restructured the company, divested its non-core, underperforming
assets and re-deployed those resources toward expanding its higher-margined,
higher-growth operations. This shift has allowed GenCorp to generate a higher
and more stable level of cash flows that have resulted in credit protection
measures that are reflective of an investment-grade entity. During this
period, leverage as measured by total debt-to-EBITDA has fallen from 2.4 times
to approximately 1.8 times, while EBITDA-to-interest has risen from 5.0 times
to approximately 15.0 times. The rating also recognizes and is tempered by
the potential use of debt to finance future growth-orientated acquisitions,
the competitive nature of the defense and automotive industries, and a
near-term rise in capital expenditures. The potential adverse impact of any
future unrecoverable environmental costs has also been incorporated into DCR's
investment-grade rating.
GenCorp's financial performance should also begin to benefit from the
investments that the company has made in its core polymer business over the
last few years. The company spent more than $300 million expanding this
segment through acquisitions such as Sequa Chemicals, the commercial
wallcovering business of Walker Greenbank PLC, Printworld and Goodyear's
Georgia-based latex facility. These acquisitions should provide GenCorp with
the ability to build on the strength of its core area, styrene-butadiene
latex, by diversifying its product lines into new but related areas such as
acrylics, plastic pigments, coatings and other related polymer products.
While debt has been used to finance a portion of these transactions,
internally generated cash flows and proceeds from asset sales have also been
utilized in order to maintain the company's financial flexibility. The
company uses a 40-50 percent debt-to-capital target range (unadjusted for
off-balance-sheet obligations) to manage its balance sheet and it is expected
that the company will be within this range in the near term. Movements above
this range are incorporated into DCR's rating because the company has
indicated that future acquisitions might require the use of external
financings. However, any upward deviations from the targeted range are not
expected to be prolonged because management has reaffirmed its commitment to a
solid capital structure while maintaining financial flexibility. The recent
announcement to sell the Penn Racquet Sports Division could also provide a
source of liquidity to help finance any future acquisition plans.
GenCorp, with sales in excess of $1.7 billion, operates in three principal
business segments: polymer, aerospace and automotive related products. In the
polymer segment, the company currently holds leading market share positions in
areas such as commercial wallcoverings, coated fabrics, wood laminates and
styrene-butadiene polymers. The aerospace division is a major supplier of
liquid and solid propellant rocket engines and electronic sensor systems for
use by the Department of Defense and NASA while the automotive operations are
centered on the production of rubber sealing systems and components for the
automobile industry. The proposed spin-off of the polymer products businesses
is anticipated to occur during the second half of 1999.