Rating Action: Moody's downgrades ATI's ratings (CFR to B2); outlook is stable
Global Credit Research - 20 Aug 2020
NOTE: On August 27, 2020, the press release was corrected as follows: The first sentence of the FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS section was changed to: Though a rating upgrade is unlikely in the near term, ATI's rating could be upgraded if the company demonstrates the ability to sustain EBIT/interest above 2x, debt/EBITDA below 5x and an adjusted EBIT margin at or better than 5%. Revised Release follows.
New York, August 20, 2020 -- Moody's Investors Service, ("Moody's") downgraded Allegheny Technologies Incorporated's (ATI) Corporate Family Rating (CFR) and Probability of Default ratings to B2 and B2-PD respectively from B1 and B1-PD respectively, the senior unsecured ratings to B3 from B2 and the shelf rating for senior unsecured debt to (P)B3 from (P)B2. The senior unsecured rating for Allegheny Ludlum Corporation was downgraded to B3 from B2. ATI's speculative grade liquidity rating was unchanged at SGL-2. The outlook is stable.
"The ratings downgrade reflects the negative impact of the spread of the coronavirus on many of ATI's end-markets, specifically aerospace and oil & gas, which account for more than 60% of sales and will result in a deterioration in the company's operating performance and metrics in 2020 with only gradual improvement expected over the next 2 years" said Carol Cowan, Moody's Senior Vice President and lead analyst for ATI.
..Issuer: Allegheny Ludlum Corporation
....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD4) from B2 (LGD4)
..Issuer: Allegheny Technologies Incorporated
.... Corporate Family Rating, Downgraded to B2 from B1
.... Probability of Default Rating, Downgraded to B2-PD from B1-PD
....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD4) from B2 (LGD4)
....Senior Unsecured Shelf, Downgraded to (P)B3 from (P)B2
..Issuer: Allegheny Ludlum Corporation
....Outlook, Remains Stable
..Issuer: Allegheny Technologies Incorporated
....Outlook, Remains Stable
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. The combined credit effects of these developments are unprecedented. The commercial aviation, automotive and energy sectors are amongst sectors most significantly affected by the shock given the exposure to declining passenger traffic, travel restrictions and sensitivity to consumer demand and sentiment. ATI has substantial exposure to the aerospace and defense sector which accounts for more than 50% of revenue in addition to having exposure to the Oil & Gas sector which accounts for more than 10% of revenue, making the company vulnerable to the material drop in airframe and aero engine build and production rates as well as the decline in drilling activity across these two industries. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Overall, the action reflects the broad deterioration in the credit quality that the impact of the coronavirus has caused.
ATI's B2 CFR reflects the company's strong position as a leading producer of specialty titanium and titanium alloys, nickel-based alloys and super alloys serving a wide range of end markets including aerospace and defense, automotive, Oil & Gas, medical, electronics, and many others. The company benefits from long term agreements (LTA's) with many of its customers across the airframe, aero engine, defense and medical markets. However, despite these favorable market attributes, the duration of recovery time remains uncertain and is expected to be extended in the aerospace and Oil & Gas industries, although ATI is more exposed to the offshore markets in this industry.
The company's operating performance began to deteriorate through the second quarter of 2020 ending June 30th driven by the curtailments in aerospace production rates, ongoing issues related to the grounding of the Boeing 737 Max, slowing in drilling activity, and reduced non-essential surgery volumes resulting in a near 20% drop in revenues and a 37% reduction in Moody's Adjusted EBITDA to $77 million from $111 million in the first quarter of 2020. While recovery is expected to slowly pick up in the electronics, general industry and medical sectors (given the need to clear inventory) in the 2nd half of 2020 the recovery in aerospace is expected to be protracted over a period of several years. Overall, improvement in end markets is expected to be erratic.
Given the decline in earnings in the second quarter, ATI's debt/EBITDA (including Moody's standard adjustments for pension and leases) increased to 5.3x through June 2020 LTM up from 4.4x at the end of fiscal year 2019. Based upon an assumed 50% reduction in EBITDA in 2020 relative to 2019, Moody's expects leverage to be near 10x by the end of 2020 and to remain elevated for the B2 CFR well into 2021. However, the ratings are supported by the company's good liquidity profile, expectation for free cash flow generation, and absence of material debt maturities in the near term.
In response to the coronavirus, the company has outlined $140 million to $160 million in expense reductions of which 40% to 50% are expected to be permanent going forward. The company is expected to generate positive free cash flow in 2020 on working capital benefits and the reduction of inventory.
ATI like others in its industry faces numerous ESG risks including strict environmental regulations pertaining to emissions and waste management in addition to having 40% of its workforce covered by various collective bargaining agreements (CBA). The company extended its most recent labor agreement with the United Steelworkers (USW), which covers approximately 1,500 employees until February 2021.
The SGL-2 Speculative Grade Liquidity rating considers the company's good liquidity profile. The company's liquidity profile is composed of $539 million in cash at June 30, 2020 and an undrawn $500 million asset backed revolving credit facility (ABL). After redeeming 71% of the 2022 convertible notes the company does not have any major maturities until 2023.
The stable outlook incorporates expectations that ATI's operating performance will show very gradual improvement through the next twelve months driven by improvements in the electronics, medical, and industrial sectors together with good performance in defense. The outlook also anticipates that improvement in aerospace, which provides more value added revenues, will be over a prolonged period given slowing in airframe build rates, particularly at Boeing and inventory destocking by the aero engine manufacturers. Also included in the outlook is the expectation that the company will maintain a balanced approach to its capital spending and maintain ample liquidity.
The B3 rating on ATI's senior unsecured instruments reflects the effective subordination of unsecured debt in the capital structure relative to the ABL facility and the Term Loan. The senior unsecured debt at Allegheny Ludlum (guaranteed by ATI) has the same rating as the senior unsecured debt at ATI given the high level of interdependence between the operations. The instruments are also considered to be at parity given the significantly higher asset values of ATI relative to the asset value of Allegheny Ludlum and the view that given the operating interdependence, ATI would support Allegheny Ludlum.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Though a rating upgrade is unlikely in the near term, ATI's rating could be upgraded if the company demonstrates the ability to sustain EBIT/interest above 2x, debt/EBITDA below 5x and an adjusted EBIT margin at or better than 5%.
The rating could be downgraded if liquidity, measured as cash plus revolver availability, evidences a material deterioration. Furthermore, downward rating pressure could materialize if the slowdown in aerospace is extended (beyond 2 to 3 years currently suggested) and customers further cut back on orders.
Quantitatively, ratings could be downgraded if the adjusted EBIT margin is expected to be sustained below 3%, CFO less dividends/debt is sustained below 10% or free cash flow is negative.
Headquartered in Pittsburgh, Pennsylvania, ATI is a diversified producer and distributor of components and specialty metals such as titanium and titanium alloys, nickel-based alloys and stainless and specialty steel alloys. The company operates through two segments: High Performance Materials and Components and Advanced Alloys & Solutions. Revenues for the twelve months ended June 30, 2020 were $3.8 billion.
The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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 EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU 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.
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Carol Cowan Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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