New York, April 29, 2020 -- Moody's Investors Service, ("Moody's") assigned
a Ba1 rating to Arconic Corporation's (Arconic) 1st lien senior
secured notes and downgraded the Corporate Family Rating (CFR) to Ba3
from Ba2 and the Probability of Default Rating to Ba3-PD from Ba2-PD.
The Ba3 2nd lien senior secured notes rating was affirmed. The
SGL-1 speculative liquidity grade rating is unchanged. The
outlook was changed to stable from negative.
Proceeds from the 1st lien senior secured notes will be used to repay
the $600 million secured term loan B under the secured revolving
credit facility and for general corporate purposes. The $1
billion secured revolving credit portion of the facility will be replaced
by a $750 million asset-backed lending (ABL) facility.
The ratings on the secured credit facility will be withdrawn upon closing
of the new financings.
"The downgrade to the Ba3 CFR reflects the challenging conditions
facing Arconic's end markets, particularly ground transportation
and aerospace but industrial and construction as well given the significant
deterioration in global economic conditions and reduced manufacturing
activity as a result of the coronavirus. Arconic's diversity
of end markets served, global footprint, liquidity position
and absence of near term debt maturities however provide support to the
Ba3 CFR." said Carol Cowan Moody's Senior Vice President
and lead analyst for Arconic.
Arconic Corporation is the spin off from its parent, Arconic Inc
(effective April 1, 2020) of the Global Rolled Products, Extrusions,
Building and Construction businesses. At the time of separation,
Arconic Corporation paid a $700 million distribution to Arconic
Inc. Upon completion of the spin Arconic Inc. was renamed
Howmet Aerospace Inc.
Downgrades:
..Issuer: Arconic Corporation
.... Corporate Family Rating, Downgraded
to Ba3 from Ba2
.... Probability of Default Rating,
Downgraded to Ba3-PD from Ba2-PD
Affirmations:
..Issuer: Arconic Corporation
....Senior Secured Regular Bond/Debenture,
Affirmed Ba3 (LGD3 from LGD4)
Assignments:
..Issuer: Arconic Corporation
....Senior Secured Regular Bond/Debenture,
Assigned Ba1 (LGD2)
Outlook Actions:
..Issuer: Arconic Corporation
....Outlook, Changed To Stable From
Negative
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The aluminum sector is
a sector that will be affected by the shock given the sensitivity of its
customers to market demand, such as automotive, aerospace,
construction, general manufacturing and market sentiment as to global
economic contraction expectations. We regard the coronavirus outbreak
as a social risk under our ESG framework, given the substantial
implications for public health and safety.
The Ba3 CFR considers Arconic's strong and leading position in the
mid-stream aluminum industry with a broad operating footprint and
diversified end market exposure that provides market and geographic diversity.
Arconic will be a midstream aluminum producer providing aluminum sheet,
plate and other products to a diversity of end markets. The company
operates through 3 operating segments: Global Rolled Products,
Building and Construction Systems and Extrusions and serves 5 principal
market segments. The key end markets accounted for revenues in
2019 as follows: Ground Transportation (35%), Aerospace
(18%), Building and Construction (18%), Industrial
(16%) and Packaging (12%), all as of year-end
December 31, 2019. Of the revenue dispersion, GRP (Global
Rolled Products) is by far the largest contributor at roughly 77%
and the largest generator of EBITDA. Revenues in 2019 were $7.3
billion. Preliminary information indicates first quarter 2020 revenue
of $1.6 billion, roughly 12 below the comparable 2019
period on impacts from the coronavirus and the 737 Max somewhat mitigated
by better performance in the industrial segment. Improved cost
position and lower aluminum prices are indicated to have contributed to
an advance in operating income to approximately $170 million.
Productivity and efficiency improvements together with enhance scrap material
sourcing are expected to continue to favorably benefit performance.
Despite the acceptable operating performance in the quarter ended March
31, 2020, performance in the second quarter is expected to
fall sharply on curtailments of automotive production, which commenced
in late March and reduction in aircraft build rates. In the company's
packaging operations outside of North America where it does not currently
participate, performance has held better. From a forward
looking perspective, the automotive sector, a more material
revenue driver, is expected to evidence a slowly improving performance
earlier than any improvement expected in aerospace build rates; nonetheless,
improvement is expected to be slow and protracted. Assuming a 30%
- 40% decline in EBITDA ($785 million in 2019 including
Moody's standard adjustments) in 2020 leverage is expected to range
between 4.5x and 5.5x with breakeven to moderately negative
free cash flow. However, Arconic's good liquidity position
together with actions taken to cut costs, such as reduction in capital
expenditures and postponement of the initiation of a dividend payment
and improvement in variable cost position provide a degree of tolerance
to leverage being outside levels appropriate for a Ba3 CFR.
While the CFR reflects Arconic's good position in markets served
and global footprint, the quantitative metrics are countered by
several factors. These would include potential liabilities related
to the Grenfell Tower litigation and related class action suits,
although this has a long tail and is not quantifiable at this time,
environmental remediation expenditure requirements that have passed to
Arconic, and the fact that the new company does not have an established
track record as to financial discipline, execution on strategic
objectives or ability to achieve margin and earnings improvements anticipated
prior to the coronavirus.
The SGL-1 Speculative Grade Liquidity rating considers Arconic's
anticipated $750 million ABL, expected potential for moderate
negative free cash flow generation in 2020 and the absence of any debt
maturities over the next several years.
The stable outlook reflects the view that Arconic will maintain a good
liquidity profile, and that gradual improvement in earnings performance
will unfold over the next twelve to eighteen months, despite the
weakness anticipated for the next several quarters given the uncertainty
surrounding the duration of curtailments in automotive production and
aircraft built rates slowing as a result of the deterioration in global
economic growth expectations due to the impact of the coronavirus.
However, the company is viewed as conservatively capitalized,
and this together with its solid liquidity position allows for some cushion
in weakening in performance and metrics in 2020.
The Ba1 rating on the first lien senior secured notes reflects their superior
position in the capital structure. The Ba3 rating on the senior
secured 2nd lien bonds, at the same level as the CFR reflects their
weaker position in the capital structure with limited loss absorption
underneath their position, and mostly coming from the unfunded pension
levels and remainder payables, although the level of secured debt
in the capital structure supports the rating at the CFR level.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would consider an upgrade of Arconic's credit ratings if
leverage (adjusted debt/EBITDA) improves to below 3.5x, interest
coverage (adjusted EBIT/Interest) increases to above 3x and an adjusted
EBIT margin to above 7% on a sustained basis. Expectations
of sustainable positive Moody-s adjusted free cash generation is
also a prerequisite the ratings upgrade.
Arconic's ratings could be downgraded if liquidity, measured
as cash plus revolver availability, evidences a material deterioration.
Expectations of significantly prolonged production rate cuts by the company's
customers or an extended slump in the automotive and aerospace markets
could lead to negative pressure on the ratings. Quantitatively,
ratings could be downgraded if the adjusted EBIT margin is expected to
be sustained below 5% or (Cash flow from operations less dividends)/debt
is sustained below 20%.
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.
Headquartered in Pittsburgh, PA, Arconic is a downstream aluminum
producer active in a number of diverse end markets. Revenues in
2019 were $7.3 billion.
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 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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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
