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Constellium SE -- Moody's assigns a B2 rating to Constellium's proposed $500 million notes

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Rating Action: Moody's assigns a B2 rating to Constellium's proposed $500 million notesGlobal Credit Research - 09 Feb 2021Frankfurt am Main, February 09, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B2 instrument rating to Constellium SE's ("Constellium" or "group") proposed sustainability-linked $500 million senior unsecured notes due 2029. All other ratings on Constellium, including the B2 corporate family rating (CFR), the B2-PD probability of default rating (PDR), and the B2 instrument ratings on its existing senior unsecured notes (due 2024, 2025, 2026 and 2028) remain unchanged. The outlook on all ratings is negative.RATINGS RATIONALEThe proposed new 8-year $500 million notes will rank pari passu with the group's existing senior unsecured notes, including the $400 million notes due 2024, the $650 million notes due 2025, the $500 million and E400 million notes due 2026 and the $325 million notes due 2028, all issued by Constellium SE. The assigned B2 rating on the new notes is in line with Constellium's B2 CFR and B2-PD PDR, reflecting Moody's standard assumption of a 50% family recovery rate. Constellium has targeted a 25% reduction of its greenhouse gas emission intensity by 2025 versus 2015 and a 10% increase in recycled aluminum input by 2026 versus 2019. The new notes will have a sustainability-linked feature of a 12.5 basis points coupon step-up from 2026 onwards in the event that the first sustainability performance target is not achieved and a 12.5 basis points coupon step-up from 2027 onwards in the event that the second sustainability performance target is not achieved.Proceeds from the proposed notes together with available cash on the balance sheet will be used to redeem Constellium's 6.625% $650 million senior unsecured notes due 2025 at a redemption price of 101.656% and to pay accrued and unpaid interest and expected transaction costs. Upon completion of the refinancing, Moody's expects to withdraw the B2 instrument rating on the 2025 notes.Moody's acknowledges the group's demonstrated commitment to reduce debt in line with its de-leveraging targets, as shown by the about E130 million decrease in total debt (0.3x leverage effect) resulting from the transaction, besides the associated interest cost savings. The proposed refinancing will further improve the group's debt maturity profile, with the 2024 $400 million bond and the E180 million French state guaranteed loan (expiring 2026) maturing in the upcoming five years. Moody's also recognizes the sustainability-linked component of the new notes, which underscores the group's commitment to significantly lower its carbon emissions.The B2 CFR and the negative outlook remain unchanged, however, considering a continued challenging macro-economic environment, still-sluggish demand in some end-markets (e.g. aerospace) and ongoing coronavirus related uncertainties. Latest credit metrics, such as Moody's-adjusted gross leverage of 8.5x as of 30 September 2020, position Constellium weakly in the B2 category, although Moody's expects the ratio to clearly recover and solidify the rating positioning during 2021. Moody's also acknowledges Constellium's better than anticipated performance last year thanks to effective cost cutting, while overall shipments fell by 14% in the first nine months of 2020. The rating agency further expects Constellium to post solid positive Moody's-adjusted free cash flow (FCF) in 2020 (E199 million in the 12 months ended 30 September 2020), primarily driven by lower capital spending and working capital reductions.Other factors supporting the B2 CFR include Constellium's (1) solid business profile, underpinned by its diverse product mix and strong market share in high-value-added aluminum rolled and extruded products; (2) healthy liquidity with available cash sources of more than E1 billion at September-end 2020; and (3) measures initiated to reduce costs and preserve free cash flow and liquidity during the coronavirus-driven crisis.Factors constraining the rating include (1) Constellium's exposure to cyclical end markets, such as automotive, aerospace and industrial; (2) the high capital intensity of its business, resulting in earnings sensitivity to volumes; and (3) exposure to metal premium price volatility, although a large share can usually be passed through to customers.LIQUIDITYConstellium bolstered its solid liquidity profile during 2020 through a $166 million Delayed Drawn Term Loan (currently undrawn), around E250 million of European government-sponsored credit facilities, and the refinancing of notes due 2021 with new $325 million notes due 2028. As of 30 September 2020, Constellium had E432 million cash on the balance sheet and close to E600 million additional liquidity sources. These, together with forecast positive FCF for 2021, will comfortably cover its basic near-term cash needs and the proposed bond transaction.RATIONALE FOR THE NEGATIVE OUTLOOKThe negative outlook indicates Constellium's currently weak positioning in the B2 rating category which is driven by a sharp deterioration in the company's operating performance in 2020 due to the coronavirus pandemic and the lack of visibility into the pace of recovery in 2021. Demonstration of a steady performance recovery and improvement in credit metrics, however, could support a stabilization of the outlook over the next quarters.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGNegative rating pressure would build, if Constellium's (1) Moody's-adjusted EBIT margin remains persistently below 5%, (2) leverage could not be reduced towards 6.0x Moody's-adjusted debt/EBITDA over the next 18 months, (3) FCF turns sustainably negative, (4) liquidity deteriorates.Upward pressure on the rating would build, if Constellium's (1) Moody's-adjusted debt/EBITDA falls below 4.5x, (2) (CFO - dividends)/debt improves to at least 15%, (3) FCF remains consistently positive.PRINCIPAL METHODOLOGYThe principal methodology used in this rating 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.COMPANY PROFILEHeadquartered in France, Constellium SE (Constellium) is a global leader in the designing and manufacturing of innovative and high-value-added aluminum products for a broad range of applications dedicated primarily to packaging, aerospace and automotive end-markets. Constellium is organized in three business segments: Packaging & Automotive Rolled Products (P&ARP); Aerospace & Transportation (A&T), and Automotive Structures & Industry (AS&I). In the last 12 months ended 30 September 2020, Constellium generated revenue of E5.0 billion and Moody's-adjusted EBITDA of E386 million (7.7% margin).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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is 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_1243406.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. 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