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Rating Action:

Moody's affirms Allegheny Technologies' B2 CFR; assigns B3 rating to senior notes

08 Sep 2021

New York, September 08, 2021 -- Moody's Investors Service, ("Moody's") affirmed Allegheny Technologies Incorporated's (ATI) B2 Corporate Family Rating (CFR), B2-PD Probability of Default rating and its B3 senior unsecured ratings. The B3 senior unsecured rating for Allegheny Ludlum Corporation was also affirmed. At the same time, Moody's assigned a B3 rating to ATI's proposed senior notes which will include an 8-year and a 10-year tranche with a minimum size of $300 million for each tranche and a targeted total amount of $650 million, and a rating of (P)B3 to ATI's senior unsecured shelf from which the notes will be issued. The proceeds will be used to redeem its $500 million of senior notes due 2023 and pay associated premiums and fees and to make a contribution of up to $50 million to its underfunded pension plan. The remaining proceeds will be added to its cash balance. ATI's speculative grade liquidity rating remains at SGL-2. The outlook is stable.

"The affirmation of Allegheny Technologies ratings reflects our expectation that its operating performance will gradually improve over the next 12 to 18 months and its credit metrics will become more commensurate with its rating" said Michael Corelli, Moody's Senior Vice President and lead analyst for Allegheny Technologies Incorporated.

Assignments:

..Issuer: Allegheny Technologies Incorporated

....Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD4)

....Senior Unsecured Shelf, Assigned (P)B3

Affirmations:

..Issuer: Allegheny Ludlum Corporation

....Gtd Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD4)

..Issuer: Allegheny Technologies Incorporated

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD4)

Outlook Actions:

..Issuer: Allegheny Ludlum Corporation

....Outlook, Remains Stable

..Issuer: Allegheny Technologies Incorporated

....Outlook, Remains Stable

RATINGS RATIONALE

Allegheny Technologies B2 corporate family rating reflects its very high near-term leverage and weak interest coverage due to the gradual recovery in the commercial aerospace market which weakened materially in 2020 due to the COVID-19 pandemic. It also incorporates our expectation for a gradually improving operating performance, which will enable its credit metrics to eventually return to a level that is more commensurate with its rating. Although, its operating performance will remain historically weak over the next 12 to 18 months.

ATI's rating also reflects its 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, energy, medical, electronics, automotive and others. The company benefits from long term agreements (LTA's) with many of its customers across the airframe, aero engine, defense and medical markets. The rating also incorporates its good liquidity position which provides support to its credit profile and enables it to navigate the near-term weakness in its operating performance and potential investments in working capital as its business recovers.

ATI's operating performance is expected to gradually improve along with the protracted recovery in the commercial aerospace sector, since the aerospace and defense sectors account for more than 50% of revenue in a typical year. Continued strength in the defense sector and improving trends in the specialty energy (about 10% of sales), electronics and medical end markets will also support its recovery. In addition, it will benefit from recent cost cutting initiatives and its new toll converting agreement with JSW Steel. However, the improvement in its operating performance will be tempered by a 105-day strike by 1,300 united steelworkers at nine plants primarily in the Specialty Rolled Products division of its Advanced Alloys & Solutions segment. The company and the union reached an agreement on a new contract in mid-July 2021, but the company estimates it incurred about $40 million of costs related to the strike in Q2 2021 and expects an additional negative impact in Q3. Including the impact of the strike and excluding the pre-tax gain of approximately $65 million related to reduced funding requirements for postretirement medical benefits resulting from the new USW labor agreement, we anticipate that ATI's adjusted EBITDA will be relatively flat with last year and in the range of $240 million - $260 million in 2021. Its operating performance should materially improve in 2022 as the economic recovery continues and strike related costs go away.

ATI's credit metrics have weakened materially with a leverage ratio (debt/EBITDA) of 11.6x as of June 2021 due to the substantial decline in its operating results which was exacerbated by the impact of the steelworkers strike and an increase in its outstanding debt as it focused on shoring up its liquidity position. We expect the company's leverage ratio will decline to about 9.5x in December 2021 and continue to strengthen thereafter as it benefits from improved end market demand, a lower pension underfunding adjustment and the elimination of strike related costs. The leverage ratio would be closer to 7.5x excluding the strike related costs which are unlikely to be repeated next year and its adjusted debt level will decline in 2022 due to voluntary pension plan contributions. In addition, the leverage ratio would be about 8.0x on a pro forma basis assuming the company's convertible debt is converted to equity. The leverage ratio calculation includes $84.2 million of convertible notes due in July 2022 with a conversion price of $14.45 per share and $291.4 million of convertible notes due 2025 with a conversion price of $15.49 per share. The company's current share price is about $18.00 per share so it is possible this debt could eventually convert to equity.

ATI's speculative grade liquidity rating of SGL-2 considers the company's good liquidity profile which consists of $472.5 million in cash and approximately $350 million of borrowing availability as of June 30, 2021. The company utilized $42.8 million of its revolver availability to support the issuance of letters of credit and had no borrowings outstanding on its $500 million asset backed revolving credit facility (ABL) which matures in September 2024. Availability was limited by the borrowing base calculation and since the company did not meet the springing fixed charge coverage ratio test.

The B3 rating on ATI's senior unsecured debt instruments reflects the effective subordination of the unsecured debt 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.

The stable outlook incorporates our expectation that ATI's operating performance will gradually improve over the next 12 to 18 months and its credit metrics will become more commensurate with its rating.

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 operating margin above 5%.

Downward rating pressure could materialize if the recovery in the aerospace sector is more protracted than currently anticipated and ATI's adjusted operating margin remains below 3%, retained cash flow is sustained below 6% of outstanding debt or free cash flow remains negative. The rating could also be downgraded if the company's liquidity position materially deteriorates.

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. It sells these products to the aerospace & defense, energy, automotive, electronics, medical, construction, mining, appliance and food equipment sectors. For the twelve months ended June 30, 2021 the company generated revenues of $2.6 billion.

The principal methodology used in these ratings was Aerospace and Defense Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1224306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

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.

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. Further information on the UK 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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Corelli, CFA
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

No Related Data.
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