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Rating Action:

MOODY'S UPGRADES ALLEGHENY TECHNOLOGIES RATINGS (CORPORATE FAMILY TO Ba2); RATING OUTLOOK STABLE

05 Dec 2005
MOODY'S UPGRADES ALLEGHENY TECHNOLOGIES RATINGS (CORPORATE FAMILY TO Ba2); RATING OUTLOOK STABLE

Approximately $450 million of Debt Securities upgraded

New York, December 05, 2005 -- Moody's Investors Service upgraded Allegheny Technologies Inc.'s (ATI), corporate family rating to Ba2 from B1 and its senior unsecured note rating to Ba3 from B3. In a related rating action, Moody's upgraded Allegheny Ludlum's debentures, guaranteed by ATI, to Ba2 from B1. The rating outlook is stable.

The upgrade recognizes ATI's significantly improved operating and cash flow generation performance, strengthened debt protection measures and solid liquidity position. The improved profile reflects not only the benefits from a more positive business and price environment but also the benefits being achieved as the company continues to execute its plan to transform its business platform and focus on higher value added products in its flat rolled segment as well as high performance metals segment. The upgrade also recognizes the number of initiatives taken by the company to achieve permanent reductions in its cost base, which include reduction in other post retirement benefit liabilities and strengthening its capital structure. As a result, Moody's believes the company is better positioned to weather the ongoing cyclical nature inherent in its business.

The stable outlook reflects Moody's expectation that the company's performance through 2006 will continue to exhibit strong earnings and cash flow generation, reflective of strength in key end-use segments such as aerospace and chemicals and the improving profile in non-residential construction. The outlook also anticipates that the company will continue, on its improved cash flow generation, to manage its cash uses relative to its cash sources, fund capital expenditures from internally generated funds, as announced, and maintain a liquidity position that provides good cushion for the down years in the stainless steel sector. Based upon the company's anticipated earnings performance, cash flow generation levels, strong cash position and the absence of any material debt maturities in the near term, it is unlikely that the rating would be downgraded absent debt financed acquisitions or a material change in levels of shareholder returns. Continued improvement in operating and leverage metrics such that a sustainable EBIT margin on the order of 13% and adjusted debt/EBITDA remaining in the 2.5x range were achieved, together with ongoing free cash flow generation, could be contributing factors for a rating upgrade.

ATI's rating reflects the company's improved financial position following several quarters of increased demand in key end-user markets, as well as the benefits of its earlier business and financial restructuring activities. Moody's believes the current business platform, larger, due to the acquisition of J&L Steel in 2004, and less leveraged, with the June 2004 equity offering of $230 million, is better placed to take advantage of the current robust demand in aerospace and other specialty alloy end-markets as well as the improved stainless steel markets. In addition, the acquisition of J&L, which appears to have been integrated with little difficulty, has brought several benefits. Importantly, the acquisition provided a platform for ATI to negotiate with its union workforce for improved terms relating to productivity and costs both at the J&L facilities as well as heritage ATI operations. Post retirement liabilities have been reduced by approximately $331 million due to the ability to cap the company's share of retiree medical costs and other measures. ATI has also made investments in its melting capacity with the start-up of two new electric arc furnaces, thereby improving efficiency and the cost platform.

Segment operating margin percentages are now in the mid teens compared to low single digits in recent years. Although debt levels remain essentially unchanged since year-end 2004, ATI's debt coverage ratios have improved substantially and are now placed comfortably at or above the Ba range on several metrics based on Moody's rating methodology. Sustainability of these levels will be an important rating consideration going forward. For the LTM period ended September 30, 2005, Adjusted Debt to EBITDA was 2.3x times, down from 6.4 times at year-end 2004. As ATI and its subsidiaries have no significant debt maturities until 2011, Moody's does not expect the overall debt levels to change materially and continued ratio improvement will need to be driven by growth in earnings.

Nevertheless, limiting factors in the rating include ATI's relatively small size, recent history of operating losses, which demonstrate the cyclical nature of its end-user market, exposure to rising raw material costs, import competition, and potential contraction in the US economy. Given ATI's small size and position in stainless steel and specialty materials, its operations were severely affected by the downturn in aerospace and related markets in 2001 as well as the depressed conditions in the stainless steel sector. We note that ATI incurred net losses from 2001 through 2003. Reflective of its lack of vertical integration, ATI remains weakly positioned in terms of raw material sourcing and relies on surcharges to recover rising costs for scrap steel, nickel and titanium and, more recently, energy. To date the company has been successful in mitigating increasing raw material costs, although there can be a bit of a lag period.

The notching of ATI's senior unsecured notes (rated Ba3) one rating category below the corporate family rating reflects the contractual and structural subordination of these notes to the guaranteed senior secured $325 million revolver and to the guaranteed debentures at Allegheny Ludlum. The Ludlum operations, which include ATI's flat rolled production facilities, generated approximately 46% of ATI's operating cash flow in the period to September 30, 2005. We note that with this rating action Moody's has tightened the notching to one notch below the corporate family rating given the improved outlook for ATI's business as a whole and the overall improvement in coverage measures.

For segment reporting purposes ATI reports operating results along three business lines, Flat-Rolled Products, High Performance Metals, and Engineered Products. Flat-rolled operations should continue to dominate the overall business profile of the company as it accounts for approximately 50% of sales. Included in this operation are ATI's flat stainless steel businesses, which are generally more commodity-like and are quicker to come under pricing pressure in a downturn. ATI considers this "base-load" capacity and looks to manage production schedules to achieve higher levels of value-added steel products and enhance margins. ATI's strategy to focus on value-added steel products should position it well over the next 12-24 months as the aerospace and power generation markets, two key areas for ATI, have improved markedly from low levels in 2000-2003.

The following ratings were upgraded:

1. Allegheny Technologies Incorporated's Corporate Family Rating to Ba2 from B1,

2. Allegheny Ludlum Corporation's $150 million of 6.95% guaranteed debentures, due 2025, to Ba2 from B1,

3. Allegheny Technologies Incorporated's $300 million of 8.375% senior unsecured notes, due 2011, to Ba3 from B3

Headquartered in Pittsburgh, Pennsylvania, Allegheny Technologies Inc. is a specialty stainless steel and alloy producer with fiscal 2004 steel production of 620,000 tons and revenues of $2.7 billion. For the LTM ended September 30, 2005, revenues were $3.4 billion.

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Carol Cowan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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