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Rating Action:

Moody's downgrades ATI's ratings; assigns Ba1 CFR; outlook stable

05 Nov 2014

Approximately $1.5 billion of debt affected

New York, November 05, 2014 -- Moody's Investors Service downgraded the senior unsecured ratings of Allegheny Technologies Inc. (ATI) and Allegheny Ludlum Corporation (guaranteed by ATI) to Ba1 from Baa3. At the same time. Moody's assigned a Ba1 Corporate Family Rating (CFR), a Ba1-PD probability of default rating and a SGL-2 speculative grade liquidity rating to ATI. The rating outlook is stable. This concludes the review for downgrade initiated on August 28, 2014.

The downgrade reflects our expectation that despite ATI's good market positions, technological competencies and favorable long term contracts, particularly in the aerospace industry, a return to financial metrics appropriate for an investment grade company, on a sustainable basis, is unlikely until at least late 2016 or into 2017. Current key metrics such as EBIT/interest and debt/EBITDA of 0.4x and 7.7x respectively (reflecting Moody's standard adjustments) for the twelve months ended September 30, 2014 are expected to show only slow improvement through 2015 and into 2016 given various push outs on jet engine programs and ramp up and costs associated with the hot rolling and processing facility (HRPF) and the titanium sponge facility at Rowley. Additionally, ATI's degree of improvement remains vulnerable to the aero build rate and projects in the oil and gas industry, which could slow given current market conditions and the recent drop in oil prices, which if sustained could result in project delays. While ATI has recently announced the signing of two important long term agreements (LTA's) for jet engine programs, we believe that the benefit of these agreements will flow through to earnings performance over an extended time frame. Given where ATI stands on the aero build rate in terms of product supply and likely slowing of oil and gas projects, EBIT/interest is expected to remain below 2.5x and debt/EBITDA above 4x through most of 2016.

Assignments:

..Issuer: Allegheny Technologies Incorporated

.... Corporate Family Rating, Assigned Ba1

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

Downgrades:

..Issuer: Allegheny Technologies Incorporated

....Multiple Seniority Shelf May 29, 2015, Downgraded to (P)Ba1 from (P)Baa3

....Senior Unsecured Regular Bond/Debenture Jun 1, 2019, Downgraded to Ba1, LGD4 from Baa3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2021, Downgraded to Ba1, LGD4 from Baa3

....Senior Unsecured Regular Bond/Debenture Aug 15, 2023, Downgraded to Ba1, LGD4 from Baa3

Outlook Actions:

..Issuer: Allegheny Technologies Incorporated

....Outlook, Changed To Stable

Downgrades:

..Issuer: Allegheny Ludlum Corporation

....Senior Unsecured Regular Bond/Debenture Dec 15, 2025, Downgraded to Ba1, LGD4 from Baa3

Outlook Actions:

..Issuer: Allegheny Ludlum Corporation

....Outlook, Changed To Stable

RATINGS RATIONALE

ATI's Ba1 CFR reflects 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 the company with the ability to fulfill customers' unique product requests. Through ATI Forged Products, 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 Ba1 CFR rating incorporates our expectation for improving profitability and strengthening debt protection metrics as well as adequate cash flow generation to cover requirements through the economic cycle although over a time horizon that extends well into 2016. However, we expect that the return to more robust metrics will occur gradually, driven by continued strengthening in higher value-added product sales and strength in the aerospace markets, a key end market for the company. Given the importance of the jet engine market to improved performance, and the slower build out rate, this is likely to take time to translate into improved earnings performance. In addition , while the ramp up of the HRPF facility continues as well as the Rowley titanium sponge facility will contribute to inefficiencies over the near term, the moderation in capital expenditures will contribute to an improving cash flow generation position. Other factors captured in the rating include the volatility of the company's end markets and its relatively moderate size.

The Ba1 rating on the senior unsecured instruments under Moody's loss given default methodology reflects the fact that these debt instruments are at parity in the capital structure with other debt instruments. Should the revolving credit facility become secured, as provided for in the recent amendment to this facility, the unsecured note ratings could be negatively impacted.

The SGL -2 speculative grade liquidity rating reflects the company's $264 million cash position at September 30, 2014 and availability under its $400 million revolving credit facility expiring May 31, 2018 (unused at September 30, 2014). The company amended the revolving credit facility in October 2014 to adjust the leverage and interest coverage ratios. In addition the amendment included a springing lien on receivables and inventory should, among other factors, the company be rated below investment grade by both Moody's and Standard and Poor's. Given ATI's liquidity availability, minimal debt maturity profile, and reduced capital expenditures, the company is expected to be able to cover requirements within its overall liquidity profile although free cash flow could be modestly negative.

The stable outlook reflects our expectations that the severe downward deterioration has bottomed and that earnings performance and cash flow generation will slowly improve over the next twelve to eighteen months. The outlook also reflects ATI's good contract position and customer relationships, which will lead to improving performance as requirements for the company's products increases over this time frame.

Given the expectation for only a gradual improvement in financial metrics, a rating upgrade is unlikely over the next twelve to eighteen months. However, the ratings could be positively impacted should debt/EBITDA be sustainable at no more than 3x, the EBIT margin reach and be sustainable at 8% and (operating cash flow less dividends)/debt reach and be sustained at 30%. The outlook or ratings could be negatively impacted should the company not evidence sequential quarterly improvement such that the debt/EBITDA ratio trends to no more than 4x and EBIT/interest trends toward 2.5x

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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. For the twelve months ended September 30, 2014 the company generated revenues of $4.1 billion

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
Senior Vice President
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 B 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 downgrades ATI's ratings; assigns Ba1 CFR; outlook stable
No Related Data.
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