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Rating Action:

Moody's downgrades AMG Advanced Metallurgical Group N.V.'s CFR to B2, outlook is stable

03 Apr 2020

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

No Related Data.
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