Fitch Ratings Affirms GenCorp.

NEW YORK -- Fitch Ratings has affirmed GenCorp Inc.'s (GY) credit ratings as follows:

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

-- Senior secured bank credit facility 'BB-', Recovery Rating (RR) 'RR1';

-- Senior subordinated notes 'BB-', 'RR1';

-- Convertible subordinated notes 'B-', 'RR4';

-- Contingent convertible subordinated notes 'B-', 'RR4'.

The Rating Outlook is Stable. The ratings cover $444 million of outstanding debt.

GY's ratings benefit from the company's sizable landholdings in the Sacramento, CA area; tax loss carry forwards that may allow the company to offset pretax profits in excess of $350 million at the federal level and $275 million at the state level; the global settlement with the government that provides for up to 88% reimbursement for most of GY's environmental remediation costs; the renegotiating of the Atlas contract, which will allow GY to cease production by the end of fiscal 2007 if it does not receive better terms; the completion of its transformation into a company focused on real estate and aerospace and defense (Aerojet); fully funded pension plans; a positive defense spending environment; and the resolution of a number of outstanding lawsuits.

Partially offsetting the preceding was the U.S. Government's decision not to make Atlas contractors whole for past losses incurred due to the significant decline of commercial launches, resulting in a $169 million write-off; unsecured and subordinated seller financing of $26 million required for the Aerojet Fine Chemicals sale, which reduces liquidity; the loss and payment on a $30 million lawsuit (which may still end in GY's favor); inadequate controls resulting in small restatements in the first and second quarters of fiscal 2005; and the inability to generate positive free cash flow since before 2000. In addition, Fitch has concerns regarding activist hedge fund shareholders and the impact they could have on GY's cash deployment plans.

The recovery ratings 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 a liquidation analysis due to the significant real estate holdings and utilized conservative real estate values based on unentitled land values. All the recovery ratings benefit from the value of GY's lands with the senior secured credit facility and the senior subordinated debt expected to see 100% recovery ('RR1'), while the convertible subordinated notes and contingent convertible subordinated notes are presently expected to see a recovery in the 31% to 50% range ('RR4').

In mid-January, GY announced that it was exploring entering into a transaction with one or more residential builders for the company's Rio del Oro property which encompasses 2,700 acres of land. The land is expected to be entitled for residential and commercial use by the end of 2006. Fitch believes that a joint venture or an outright sale is being considered. Because of the land's low book value, Fitch expects any such transaction would utilize the loss carry forwards. Should a transaction occur resulting in a significant cash infusion, Fitch expects GY to use the monies to repay debt. Significantly reducing debt could result in a change in ratings, outlook and/or recovery ratings barring a dramatic deterioration at Aerojet.

Some of GY's lands still have significant environmental issues, but in 1999, the U.S. Government and GY entered into an Agreement in Principle that allows Aerojet to recover up to 88% of environmental remediation costs associated with Aerojet's Sacramento site and its former Azusa site. These costs are recovered through charges to contracts for Aerojet's products and services sold to the U.S. Government, making Aerojet's continued role as a supplier to the government critical to its ratings.

Despite prior statements by government officials about the Evolved Expendable Launch Vehicle program, of which Atlas V is a part, and ongoing discussions with prime contractor Lockheed Martin (LMT) over a long period of time, the company recently learned that government funding would not be available to cover past costs. As a result, in December, GY renegotiated its contract with LMT causing a write-off of $169 million of inventory costs for the design and production of the motors produced under the original contract. The revised terms include an increase in unit pricing but are still expected to be free cash flow negative totaling approximately $10 million over fiscal 2006 and fiscal 2007, which was included in the write-off. Later this year, the company expects to negotiate the sale of additional motors, for delivery in fiscal 2008 and beyond, but Fitch expects that GY will only do so under terms that are both profitable and generate free cash. The revised terms are a significant improvement as performing under the terms of the original contract could have been a drain on cash for a number of years.

On Nov. 30, 2005, GY completed the sale of Aerojet Fine Chemicals for $114 million, including a $26 million seller note, completing its transformation strategy. The company also resolved a number of outstanding issues including the southern California and Chino toxic tort litigations and retiree medical litigation. The Olin litigation is not quite resolved as GY is seeking relief in other jurisdictions, but the most negative outcome ($30 million payment) has already occurred and continued litigation could lead to some recoveries.

At Nov. 30, 2005, GY had a liquidity position of $171 million, consisting of $91 million of cash and full availability under its $80 million credit line. The company has an additional $17 million available for letters of credit. Despite improvements due to the transformation and recapitalization, GY's credit ratios remain very weak for the rating category, but are offset by the company's ability to monetize some of its land holdings should the need arise. GY's leverage utilizing Fitch's global definition of debt to operating EBITDA was 18.5 times (x) in fiscal 2005 -- a substantial improvement from the 64.1x in fiscal 2004. Interest coverage, using Fitch's global definition of operating EBITDA-to-interest was 1.0x in fiscal 2005, up from 0.3x in fiscal 2004. With non-cash pension expense higher than EBITDA, ratios utilizing EBITDAP were far better than those using EBITDA, but were still weak, and were as follows: debt/EBITDAP of 5.9x in fiscal 2005 and 12.3x in fiscal 2004 and EBITDAP/interest of 3.1x in 2005 and 1.3x in 2004.

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.