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Rating Action:

Moody's changes ATI's outlook to negative; affirms Baa3 senior unsecured rating

21 Oct 2013

New York, October 21, 2013 -- Moody's Investors Service changed the outlook for Allegheny Technologies Incorporated (ATI) to negative from stable and affirmed the company's Baa3 senior unsecured debt ratings as well as the Baa3 guaranteed senior unsecured rating of Allegheny Ludlum Corporation.

Outlook Actions:

..Issuer: Allegheny Ludlum Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Allegheny Technologies Incorporated

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Allegheny Ludlum Corporation

....Senior Unsecured Regular Bond/Debenture Dec 15, 2025, Affirmed Baa3

..Issuer: Allegheny Technologies Incorporated

....Multiple Seniority Shelf May 29, 2015, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture Jun 1, 2019, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2021, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture Aug 15, 2023, Affirmed Baa3

RATINGS RATIONALE

The negative outlook reflects our expectation that the market fundamentals for ATI's two largest segments, High Performance Metals (HPM) and Flat-Rolled Products (FRP), will remain challenging over the next twelve months resulting in weaker operating performance and credit metrics. HPM's performance has been negatively impacted in 2013 by pricing pressure, reduced raw material surcharges not being aligned with higher raw material costs, and lower demand and inventory destocking from the segment's key end markets, specifically the aerospace industry. FRP continues to face lackluster demand for stainless and grain-oriented electrical steel (GOES). Since certain of FRP's products tend to be relatively lower value-added, its performance is highly dependent on spot prices and volumes that have come under pressure with steel products struggling to cope with global oversupply. These market conditions are expected to remain through the balance of 2013 and into 2014. In addition, we view 2013 as a transformative year for ATI as it completes its major capital expenditure program for the Hot-Rolling and Processing Facility (HRPF) by the end of 2013 with ramp-up expected for 2014. This will provide the company with a more competitive cost position in its FRP segment and contribute to earnings improvement.

As a result of demand deceleration in end markets, ATI's total volumes and combined average selling prices, declined 2% and 12%, respectively, in the first half of fiscal 2013 versus the same prior-year period. Key profit and debt protection metrics also deteriorated, with the EBIT margin (including Moody's standard accounting adjustments), EBIT-to-interest and debt-to-EBITDA ratios tracking at 4.9%, 1.8x and 5.3x, respectively for the 12 months ending June 30, 2013.

We do not expect the unfavorable environment for FRP's stainless steel and GOES to materially abate over the next 12 months as slowing economic growth in major steel-consuming developing countries such as China will overshadow the protracted recovery in the US, while demand in the Eurozone remains muted given the region's slow climb out of recession. We view the recent drop in HPM's performance as a temporary setback caused mainly by jet engine destocking from aerospace OEMs. Large aircraft manufacturers continue to experience multi-year backlogs for commercial jet orders -- a trend that should support demand for higher-value materials as 2014 unfolds. However, we anticipate that a rebound in HPM shipments will not occur until the mid-to-late 2014 timeframe at the earliest and that for the time being, the segment will perform at less than optimal levels.

ATI maintains a good liquidity position that has exhibited positive operating cash flows in recent years. While cash balances declined to $74 million at June 30, 2013 versus $305 million at the end of fiscal 2012, the company's cash position has been bolstered by roughly $500 million in proceeds from its July 2013 debt issue. In addition approximately $600 million is expected from the sale of its tungsten materials business in a transaction expected to close in the fourth quarter of 2013. Furthermore, CAPEX is expected to moderate after the completion of the modern Hot-Rolling and Processing Facility (HRPF) by the end of 2013. Therefore, we believe that ATI can fund near-term working capital, CAPEX and approximately $402.5 million of debt maturing in 2014 through internal cash generation and cash balances without further increasing total debt balances. With the slow recovery in end markets during the course of 2014 we believe that debt-to-EBITDA and EBIT-to-interest will improve to 3.9x and 2.5x, respectively, over the next 12 to 18 months, although this is likely to be more to the back end of this time horizon. However, notwithstanding the anticipated improvement from the 12 months ending June 30, 2013, these forecasted metrics remain weak for the Baa3 rating level.

ATI's Baa3 senior unsecured ratings reflect the company's position as a leading producer of specialty titanium and titanium alloys, nickel-based alloys and super alloys and its technological capabilities, which provide ATI with the ability to fulfill customers' unique product requests. Through its ATI Ladish subsidiary, the company also has capabilities in forging, casting and machining, particularly to the aerospace industry. In addition, the company's increasing global footprint provides greater diversity to its customer base and earnings generation.

The ratings incorporate our expectation that performance will continue to face headwinds over the next twelve to eighteen months but anticipate that the company will continue to successfully execute on its cost reduction program and balance its capital expenditures relative to its cash flows upon completion of the HRPF investment. However, given the recent challenges that have negatively impacted its HPM and FRP segments in the first half of fiscal 2013, we expect that the return to more robust metrics will occur gradually and be driven by longer-term growth in higher value-added product sales and off-take from the aerospace industry, a key end market for the company. Other factors captured in the rating include the volatility of the company's end markets and its relatively moderate size.

ATI is weakly positioned in its rating category. The ratings could face negative pressure should the company's liquidity significantly contract or cash flow generation prove materially insufficient to cover planned capital investments and dividends, leading to sustained negative free cash flow. In addition, ratings could come under pressure should the improvement in performance and credit metrics that is anticipated after the completion of its capital investments take longer than originally expected or the ramp-up of the HRPF encounter delays or difficulties. In addition, ratings could be adversely impacted should there continue to be a push out in performance improvement in the HPM segment on continued inventory overhangs through the aerospace supply chain. Ratings could also be negatively impacted if the EBIT-to interest ratio does not trend toward more than 4.0x and the debt-to-EBITDA ratio to no more than 3.0x over the next twelve months. In addition, any further significant debt-financed acquisitions or share buybacks could also adversely impact the rating.

We do not envision any upward rating momentum over the near term given our expectation for muted earnings improvement and cash flow generation and subsequently low likelihood of material debt reduction. However, the ratings could be favorably impacted should the company demonstrate the ability to sustain double digit EBIT margins (at least 13%), maintain debt-to-EBITDA below 2.5 times, and demonstrate an ability to be free cash flow generative.

The principal methodology used in this rating was the Global Steel Industry Methodology published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Allegheny Technologies Incorporated ("ATI"), headquartered in Pittsburgh, PA, is a diversified producer and distributor of specialty metals such as titanium and titanium alloys, nickel-based alloys, and stainless and specialty steel alloys. The company operates through three business segments: High Performance Metals ("HPM", 44% of revenues for the 12 months ending June 30, 2013), which tends to have mostly high value-added products, including titanium-based products, nickel-based alloys and superalloys; Flat-Rolled Products ("FRP", 47% of revenues), which has a mix of value-added and commodity products; and Engineered Products ("EP", 9% of revenues). ATI generated revenues of approximately $4.6 billion for the 12 months ending June 30, 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes ATI's outlook to negative; affirms Baa3 senior unsecured rating
No Related Data.
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