Propulsion (BC) Finco S.a r.l. -- Moody's assigns B2 CFR to Propulsion (BC) Finco S.a r.l. (ITP Aero); outlook stable

Rating Action: Moody's assigns B2 CFR to Propulsion (BC) Finco S.a r.l. (ITP Aero); outlook stableGlobal Credit Research - 01 Feb 2022Frankfurt am Main, February 01, 2022 -- Moody's Investors Service ("Moody's") has today assigned a B2 Corporate Family rating (CFR) and a B2-PD Probability of Default rating to Propulsion (BC) Finco S.a r.l. (Propulsion Finco or the company), the indirect parent company of ITP Aero and top holding company of the restricted lending group (transaction remains subject to regulatory approval). Concurrently Moody's has assigned B2 instrument ratings to the USD equivalent of a EUR575 million senior secured term loan and to the USD equivalent of a EUR100 million senior secured revolving credit facility. The outlook on all ratings is stable.This is the first time that Moody's has assigned ratings to Propulsion (BC) Finco S.a r.l.RATINGS RATIONALEPropulsion Finco's B2 Corporate family rating reflects the group's (i) tier one aero engine supplier position for complete engine modules with a strong recognition for its R&D and production capabilities from aero engine Original Equipment Manufacturers, (ii) good engine programme diversification with presence on nine different engine platforms under Risk and Revenue Sharing Programmes (RRSPs) or hybrid RRSPs with a focus on wide body aircraft engines and on Rolls Royce notwithstanding the company's exposure to the PW1000G also under the RRSP agreement (one of two engine sources for the very successful A320 narrow body family), (iii) exposure to Defense programmes (15% of 2020 group revenue mainly through EJ200 engine platform, the engine of the Eurofighter) and to MRO activities (7% of 2020 group revenue) while the spin-off of ITP Aero from Rolls Royce should offer room for further growth in MRO activities over time, (iv) engine programmes at the sweet spot of their programme life with all engine programmes already out of the capital and R&D intensive phase of development and around 5 years into the 15 to 20 years production phase, a phase of the programme when the more profitable aftermarket with a high share of spare parts sale starts to kick in, (v) the positive medium term outlook for passenger traffic recovery with Moody's maintaining its positive outlook on both the Passenger Airline and Aerospace & Defense sectors despite the Omicron variant on the expectation of a sustained albeit volatile recovery in passenger traffic through 2023 and beyond, and (vi) the profitable and cash flow generative nature of Propulsion Finco's business model pre-pandemic.The company's CFR is constrained by (i) its concentration on Rolls Royce (~62% of group revenue) and wide body engine platforms, which will take longer to recover from the pandemic than narrow body engine platforms, (ii) a high initial leverage with a pro-forma leverage of around 6.0x as per LTM September 2021 albeit this is against an EBITDA that is heavily down versus pre-pandemic levels and should recover gradually over the next 2-3 years irrespective of profitability improvements that the new owners might achieve, (iii) a somewhat complex ownership structure with third party investors holding preferred equity outside of the restricted group as well as up to 30% of the equity being held by Spanish private or public investors, partially through a Basque holding company located within the restricted group notwithstanding that Bain Capital Specialty Finance, Inc. (Bain Capital) has mitigated all the cash leakage risks through the contractual terms of the senior facilities and the usage of the intercompany loans and the governance leakage through an investment agreement that clearly defines and limits the rights of the minority shareholders within the restricted group, and (iv) the carve out risk of Hucknall & Fabrications, a production site that will be carved out of Rolls Royce in addition to the relatively independent ITP Aero business although the management of ITP Aero has confirmed that the carve out process is well on time and should be finalized prior to the closing of the acquisition.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook reflects Moody's expectations that Propulsion Finco will benefit from favorable market conditions over the next 12 to 18 months supported by a gradual recovery in passenger traffic irrespective of the volatility induced by new covid-19 variants. The stable outlook also assumes that Propulsion Finco will gradually reduce leverage to bring down Moody's adjusted debt / EBITDA to below 5.5x from 6.2x pro-forma of the new capital structure and as per LTM September 2021.LIQUIDITYThe liquidity position of Propulsion Finco will be adequate at closing of the transaction. The company will have EUR50 million of cash on balance sheet at closing from overfunding of the purchase price as well as access to EUR100 million under the group's revolving credit facility. This should be more than sufficient to cover basis liquidity needs over the next twelve months mainly consisting of working cash, capex and working capital. The seasonality of the business is not very significant with a working capital swing of around EUR25-35 million intra-year, which should be well covered by cash on balance sheet and access to the revolver. Propulsion Finco has also a history of positive free cash flow generation. We expect free cash flow generation to be positive going forward further improving the company's liquidity position going forward. The revolving credit facility will only include one springing covenant. The covenant will only be tested if drawings under the facility exceed 40% and the company will enjoy ample headroom under the testing level.STRUCTURAL CONSIDERATIONSThe instrument ratings assigned to the senior secured term loan and revolving credit facility is in line with the B2 Corporate Family rating reflecting the absence of other structurally senior or junior debt instruments within the restricted group.Despite the capital structure of Propulsion Finco being solely composed of bank debt we have assumed a 50% recovery rate at the corporate family level due to the loose financial covenant package of the proposed transaction.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade is unlikely in the short term due to the high opening leverage and the uncertainties related to the recovery in passenger traffic over the next 12 months. Longer term a reduction in leverage (as measured by Moody's adjusted debt/EBITDA) to below 4.5x, an improvement in FCF/debt towards 10% and the maintenance of an adequate liquidity profile could lead to positive pressure on the rating.Conversely, the failure of Propulsion Finco to bring down leverage (as measured by Moody's adjusted debt/EBITDA) to below 5.5x over the next 12 to 18 months as well as FCF / debt trending towards 0 and a deterioration in the group's liquidity position could exert negative pressure on the rating.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Aerospace and Defense published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287887. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEPropulsion (BC) Finco S.a r.l. is the parent company of ITP Aero, a tier 1 supplier of aero engine modules headquartered in Spain. ITP Aero is currently being spun off from Rolls Royce and being acquired by funds controlled by Bain Capital.ITP Aero has leading market positions in low pressure turbines with around 25% market share of all outsources work across all aero engine programmes. The company generated adjusted revenue of EUR1.3 billion and a Moody's adjusted EBITDA of EUR175 million in 2019. ITP Aero currently employs around 4300 people.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Stanislas Duquesnoy Senior Vice President Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Christian Hendker, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​