New York, April 03, 2020 -- Moody's Investors Service, ("Moody's") downgraded
the corporate family rating of AMG Advanced Metallurgical Group N.V.
(AMG) to B2 from B1, the probability of default rating to B2-PD
from B1-PD and the ratings of the senior secured revolving credit
facility and the senior secured term loan to B1 from Ba3. Moody's
also affirmed the B3 senior unsecured rating of the $307 million
Ohio Air Quality Development Authority 30-year tax-exempt
revenue bonds (State of Ohio Exempt Facilities Revenue Bonds) which are
guaranteed by AMG Advanced Metallurgical Group N.V.,
the parent company of AMG Vanadium LLC. The Speculative Grade Liquidity
Rating remains SGL-2. The ratings outlook is stable.
"The ratings downgrade reflects a material deterioration in AMG's
financial performance in 2019 and Moody's view that AMG's
credit metrics will remain weak over next 12-18 months due to the
impact of the coronavirus outbreak, high leverage and high capex
spending," said Botir Sharipov, Vice President and lead
analyst for AMG.
Downgrades:
..Issuer: AMG Advanced Metallurgical Group N.V.
.... Corporate Family Rating, Downgraded
to B2 from B1
.... Probability of Default Rating,
Downgraded to B2-PD from B1-PD
....Senior Secured Revolving Credit Facility,
Downgraded to B1 (LGD3) from Ba3 (LGD3)
....Senior Secured Term Loan, Downgraded
to B1 (LGD3) from Ba3 (LGD3)
Affirmations:
..Issuer: Ohio Air Quality Development Authority
....Senior Unsecured Revenue Bonds Affirmed
B3 (LGD5)
Outlook Actions:
..Issuer: AMG Advanced Metallurgical Group N.V.
....Outlook, Remains Stable
RATINGS RATIONALE
AMG entered 2020 with a credit profile that was already weakened by a
precipitous decline in prices of ferrovanadium (FeV), spodumene,
tantalum, silicon metal and other critical materials it produces.
Moody's had expected that the combination of high capex, the
issuance of $307 million of tax-exempt bonds to fund the
Cambridge II project, negative free cash flow and lower commodity
prices would result in weakly positioned credit metrics during the current
growth phase. However, slower economic growth in 2019,
trade tensions and the excess global capacity for some of the metals have
led to lower than previously estimated revenues and earnings. For
example, a persistent decline in FeV price throughout 2019 had manifested
in a $88 million inventory write-down that contributed to
a sharp fall in AMG's EBITDA from $219 million in 2018 to
$34 million in 2019 including the write-down, and
the increase in Moody's debt/EBITDA to about 28x. Adjusting
for the write-down would indicate the 2019 EBITDA of $122
million and the year-end leverage of 7.8x, still notably
higher than 6.5x we expected previously.
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. Moody's has recently
revised the global real GDP forecasts downward for 2020 due to the rising
economic costs of the coronavirus shock, now expecting the global
economy to contract by 0.5% in 2020, followed by a
pickup to 3.2% in 2021. AMG's high leverage
and negative free cash flow as well as the company's significant
presence in regions severely impacted by the coronavirus outbreak,
have left it vulnerable to shifts in market sentiment in these unprecedented
operating conditions. We regard the coronavirus outbreak as a social
risk under our ESG framework, given the substantial implications
for public health and safety. Today's action reflects AMG's
already weakened credit profile, the breadth and severity of the
economic shock and the expected deterioration in credit quality the coronavirus
outbreak has triggered.
Moody's believes that depressed metal prices, challenging
steel industry conditions in Europe and the US, the near-term
uncertainty surrounding Boeing 737 MAX situation notwithstanding a significant
order backlog at the company's AMG Technologies segment, and
overall, sharp contraction in global demand will lead to lower y-o-y
volumes, prices and revenues in 2020 and will negatively impact
AMG's profitability. These factors, high capex spending
and negative free cash flow will further weaken AMG's credit profile in
2020 before improving moderately in 2021 and more meaningfully in 2022
after the company completes the construction of the Cambridge II project
in the U.S. and the battery grade hydroxide plant in Germany
and returns to positive free cash flow generation. We expect the
cost-saving initiatives and lower costs for some of the raw materials
to partially offset the expected decline in profitability. Moody's
expects AMG to generate about $100 million in Moody's adjusted
EBITDA in 2020. Adjusted leverage is expected to be around 9.5x
in 2020, before declining to below 7x in 2021. Credit metrics
are expected to return to levels appropriate for the rating by 2022.
AMG's B2 corporate family rating (CFR) is supported by its good liquidity,
good geographic and end market diversity and the importance of its products
in lightweighting, energy efficiency and carbon emissions reduction
which should lead to relatively steady customer demand over the long term.
The company also has a strong market position with only a few major competitors
for most of the critical materials it produces and sells those materials
to a number of blue chip customers with whom it has established long term
relationships. The company is expected to benefit from the recently
restructured vanadium supply contracts intended to reduce its exposure
to the FeV price volatility and improve the profitability, reaching
an agreement with Glencore for the sale of the FeV that effectively removes
the market volume risk as well as securing a large portion of the spent
catalyst supply required for Cambridge I and II plants.
The stable outlook reflects Moody's view that fiscal and monetary
policy measures being implemented by many countries will likely support
the global economic recovery in 2021 and will lead to the AMG's
EBITDA growth from 2021 onwards and result in improved credit metrics
that support its rating. The stable outlook also presumes that
free cash flow burn in 2020-2021 will be close to Moody's
expectations, that AMG will carefully manage its liquidity through
the likely economic downturn and that the company will not experience
any significant issues related to its growth projects.
AMG overall faces elevated environmental social and governance risks given
the nature of the company's operations which include mining and
high heat metallurgical processes and the location of some of its mines
and facilities in emerging markets such as China and Brazil. The
governance risk is also above average due to the management's high
tolerance for elevated leverage during the current growth phase at the
time of weakened macro environment.
AMG is expected to maintain good liquidity and will have no meaningful
debt maturities prior to the maturity date of the revolver in 2023 and
the term loan B in 2025. As of December 31, 2019, the
company had $226 million in cash and cash equivalents, $309
million in restricted cash for the Cambridge II project and $170
million available under its $200 million revolver, which
is undrawn but has a reduced borrowing capacity due to the outstanding
debt at the Brazilian subsidiary. Moody's expects the revolving
facility to remain undrawn over the rating horizon. Moody's also
expects the company to have ample headroom under its 3.5x first
lien leverage covenant despite higher leverage.
The B1 rating of the senior secured revolving credit facility and senior
secured term loan B reflects their priority position in the company's
capital structure. The credit facilities are secured by a first
priority lien on substantially all of the assets of several of the company's
operating subsidiaries and a first priority lien on 100% of the
capital stock (limited to 65% of voting stock for foreign subsidiaries)
of each subsidiary borrower and each material wholly-owned subsidiary.
However, the security package excludes the assets of a number of
key foreign subsidiaries that account for about 50-60% of
the overall assets of the company. The B3 rating of the tax-exempt
unsecured bonds reflects a relatively high proportion of secured debt
and the bonds' effective subordination to the secured debt.
The bonds are issued by the Ohio Air Quality Development Authority and
guaranteed by AMG Advanced Metallurgical Group N.V.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if the company is able to reduce and sustain
a leverage ratio below 5.0x, an interest coverage ratio above
2.0x and return to free cash flow generation. However,
AMG's moderate scale and increased product concentration will limit its
upside ratings potential.
Negative rating pressure could develop if the company experiences any
significant issues related to its growth projects. Any material
operating disruptions, weaker than expected financial and operating
performance, or the pursuit of other debt financed growth projects
that result in further deterioration of debt protection metrics would
negatively impact the company's rating. Quantitatively, the
ratings could be downgraded if the leverage is expected to be sustained
above 6.0x or the interest coverage ratio sustained below 1.5x.
A significant reduction in borrowing availability or liquidity could also
result in a downgrade.
AMG Advanced Metallurgical Group N.V., headquartered
in Wayne, Pennsylvania, produces engineered specialty metals
and mineral products through its AMG Critical Materials division.
This segment produces aluminum master alloys and powders, titanium
alloys and coatings, ferrovanadium, natural graphite,
chromium metal, antimony, tantalum, niobium and silicon
metal. Its AMG Engineering division designs and produces vacuum
furnace equipment and systems used to produce and upgrade specialty metals
and alloys. The company sells its products to the transportation,
infrastructure, energy, and specialty metals & chemicals
end markets from production facilities in Germany, the United Kingdom,
France, Czech Republic, United States, China,
Mexico, Brazil and Sri Lanka. The company produced revenues
of $1.19 billion during the twelve months ended December
31, 2019.
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
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.
Botir Sharipov
VP-Senior Analyst
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
