S&P Affirms Precision Castparts (PCP) Ratings; Places 'A-1' S-T Rating on CreditWatch Negative

Standard & Poor's Ratings Services affirmed its 'A-' long-term corporate credit rating on U.S.-based metal components manufacturer Precision Castparts Corp. (NYSE: PCP). The rating outlook is stable.

At the same time, we placed our 'A-1' short-term corporate credit and commercial paper ratings on CreditWatch with negative implications.

"Precision Castparts has above-average profit margins, efficient operations, and leading positions in niche markets for forgings, castings, and fasteners," said Standard & Poor's credit analyst Christopher DeNicolo.

However, the company is exposed to the cyclical and competitive commercial aerospace and oil and gas markets. Precision Castparts manufactures complex metal components and products, and it is the leader in large structural investment castings, airfoil castings, and forged components primarily for jet aircraft engines, as well as in airframes and landing gear. The company's acquisition strategy has enhanced its market position by broadening and adding capabilities in new and existing markets.

We could lower the short-term rating to 'A-2' if we revise our liquidity assessment to "strong" from "exceptional." This could occur if the outstanding commercial paper the company has been using to fund acquisitions and share repurchases remains high.

The long-term rating outlook is stable. We expect Precision Castparts' credit metrics to continue improving as a result of substantial free cash flow generation, combined with solid demand from the strong commercial aerospace market and a track record of successfully integrating acquisitions. However, the company's share repurchase program and increased appetite for leverage somewhat limits room in the rating for further large debt-financed acquisitions.

We could lower the rating if further large debt-financed acquisitions, material deterioration in the commercial aerospace market, or increased share repurchases result in FFO to debt of below 40% on a consistent basis.

We are unlikely to raise the rating but could do so if a lower-than-expected level of share repurchases and acquisitions results in FFO to debt above 60% and debt to EBITDA of 1x or below on a consistent basis.

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