Fitch Affirms Sequa's IDR at 'B+'; Senior Debt at 'BB/RR2'.

NEW YORK -- Fitch Ratings has affirmed Sequa Corporation's (SQA) debt and Recovery Ratings (RRs) as follows:

--Issuer Default Rating (IDR) 'B+';

--Senior unsecured notes 'BB/RR2'.

Fitch also assigns new ratings to the following issues:

Warwick International

Chromalloy UK

Chromalloy Holland

--Senior secured bank credit facility 'BB+/RR1'.

The Rating Outlook is Stable. The ratings cover approximately $900 million of outstanding debt.

The facility is not an obligation of SQA and is not guaranteed by SQA. The facility was closed in December 2005 and was primarily created to provide funds for repatriation of foreign income related to the Jobs Creation Act. The facility consists of a $100 million term loan, a $35 million revolving credit facility and a $50 million letter of credit facility, all of which expire in 2010.

SQA's ratings and Outlook reflect the company's improving operating results, maintenance of liquidity and fully funded pension plans offset by high leverage and negative free cash flow (FCF) since 2002 (driven by discretionary pension contributions and working capital needs for new business). SQA's revenues increased by 7.2% in 2005 and 20.5% in 2004 with EBITDA margins up 52 basis points over the same two-year period to 10.4%. With a number of outsourcing contract wins with US airlines and continuing efforts by airlines to reduce costs by outsourcing, the outlook for SQA's largest segment, Aerospace (Chromalloy), is positive. As a conglomerate -- albeit one that has been narrowing its focus on jet engine maintenance, repair and overhaul (MRO) -- SQA has a highly diversified portfolio of subsidiaries across products and geographies, reducing the concentration risk of individual operating businesses.

Fitch's concerns are focused on high leverage and a history of poor FCF that has led to the company funding operations via asset sales for the past few years. Fitch expects FCF to be negative once again this year, but this is expected to be driven by capital expenditures for new factories both in the US and overseas. Exclusive of the planned over 40% jump in capital expenditures for these plants, FCF could be positive based on recent trends.

Fitch is also concerned about SQA's exposure to the automobile industry and in particular its ARC Automotive (ARC) business, whose two largest customers, Delphi and Key Safety, are having financial difficulties and account for 73% of ARC's revenues, but only 9% SQA's revenues. Fitch's concerns regarding original equipment manufacturers' (OEM) possible attempts to expand market share in the MRO aftermarket are largely mitigated by Chromalloy's ability to normally provide parts faster than OEMs, decreasing engine down time. Concern is also mitigated by the desire of clients to ensure that equipment is available from more than one source.

The RRs and notching of the debt tranches reflect Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. The analysis was based on an ongoing concern scenario as it exceeds likely liquidation values. RRs at the senior secured level benefit from guarantees and security in the assets of Warwick International, Chromalloy UK, Chromalloy Holland and Chromalloy Thailand, who are also the borrowers (the facility is not an obligation of SQA.) This results in expected recovery of 100% ('RR1'). The senior notes, which are unsecured, are presently expected to see a recovery in the 70%-90% range ('RR2'). Noteholders are offered some protection from a leveraged buyout, as the change of control covenants require that SQA tender for the notes at 101% of face value upon a change of control. The unsecured RR is unchanged despite the addition of the senior secured debt because expected recoveries remain within the 'RR2'band.

At Dec. 31, 2006, SQA had a liquidity position of $376 million, consisting of $289 million of cash, $55 million of availability under its up to $75 million receivables purchase agreement (no utilization - asset base constrained) and $32 million available under a $35 million revolving credit facility. The company had an additional $13 million available for letters of credit under its $50 million letter of credit facility. SQA's leverage (utilizing Fitch's global definition of debt to operating EBITDA) was 4.6 times (x) in 2005, largely unchanged from 2004 as the company borrowed $131 million near year-end, offsetting improved EBITDA. Interest coverage (using Fitch's global definition of operating EBITDA-to-interest) was 2.8x in 2005, up from 2.4x the prior year as the result of improving EBITDA and little interest expense generated by the end of year increase in debt. Adjusting the ratios for pension expense, leverage rose to 4.5x in 2005 versus 4.3x in 2004 and interest coverage rose to 2.9x from 2.6x during the same time frame.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.