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Rating Action:

Moody's downgrades Carpenters ratings (CFR to Ba3) - outlook to negative

24 Jun 2020

New York, June 24, 2020 -- Moody's Investors Service, ("Moody's") downgraded Carpenter Technology Corporation's (Carpenter) Corporate Family Rating (CFR) to Ba3 from Ba1, its Probability of Default rating to Ba3-PD from Ba1-PD and its senior unsecured notes ratings to Ba3 from Ba1. The Speculative Grade Liquidity rating was downgraded to SGL-3 from SGL-2. The outlook was changed to negative from stable.

"The downgrade to Ba3 in the CFR reflects the significant deterioration expected in Carpenter's operating performance and metrics as a result of coronavirus related disruptions on manufacturers in key end markets and the supply chains that serve them, particularly aerospace, which accounts for roughly 59% of revenues excluding surcharges" said Carol Cowan, Moody's Senior Vice President and lead analyst for Carpenter. "Additionally, the fall off in profitability and EBITDA will be more pronounced than revenues due to the substantive value added component of specialty alloys into its markets served such as aeroengines" Cowan added.

Downgrades:

..Issuer: Carpenter Technology Corporation

.... Corporate Family Rating, Downgraded to Ba3 from Ba1

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba1-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 (LGD4) from Ba1 (LGD4)

Outlook Actions:

..Issuer: Carpenter Technology Corporation

....Outlook, Changed To Negative From Stable

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 commercial aviation, automotive and energy sectors are amongst sectors most significantly affected by the shock given the exposure to declining passenger traffic, travel restrictions and sensitivity to consumer demand and sentiment. More specifically, Carpenter's substantial exposure to the aerospace and defense sector (roughly 59% of revenues excluding surcharges and automotive roughly 6% of revenues net of surcharges makes the company vulnerable to the material drop in build and production rates as well as the decline in drilling activity across these industries 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 the impact on of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Carpenters Ba3 CFR considers the company's strong position in the specialty metals markets as a producer of high strength, high temperature, corrosion resistant alloys. The company's, technological capabilities, which allow it to provide necessary products such as special alloys and titanium products for demanding end use industries such as aerospace, oil & gas drilling - particularly directional drilling - and medical applications are also acknowledged. These attributes position the company to achieve stronger performance in the markets served, although the duration of recovery time remains uncertain and is expected to be extended in the aerospace and transportation segments.

Carpenter participates in the following market segments: Aerospace and Defense, Medical, Transportation, Energy, and Industrial and Consumer. In the Aerospace and Defense segment, with respect to product mix within that segment, approximately 40% is engines, 20% fasteners, 30% structural and 10% defense although these percentages can fluctuate depending on build rates.

As Carpenter has a June 30 fiscal year-end, its 2020 performance will remain reasonable although the 4th quarter will be more materially impacted on the production curtailments in aerospace, the ongoing issues with and grounding of the Boeing 737 MAX and automotive (domestic auto production curtailed from roughly mid-March to mid-May) and ramp up will be slow in these industries. Additionally, the postponement of elective surgeries in the recent months will impact the company's sales to medical end markets although this is expected to show improving trends over the balance of calendar 2020. The company's exiting of its Amega West oil and gas business will remove this drain on earnings. Recovery in aerospace is expected to be protracted over a period of several years.

Given that we expect EBITDA to fall significantly more than revenues given the value added component in the aerospace and defense segment, leverage, as measured by the debt/EBITDA ratio (including Moody's standard adjustments for pension and leases) is expected to exceed 12% in fiscal 2021 and remain above 5x in 2022. We have assumed EBITDA of around adjusted $320 million in 2020. Adjusted EBITDA for the three quarters to March 31, 2020 was $283 million.

In response to the coronavirus, the company has taken a number of steps including a review of capital investments, which is expected to improve cash flow by $50 million in fiscal 2021 and a 20% reduction in global salaried positions among other actions. These actions are expected to yield roughly $60/$70 million in cost savings. Carpenter is expected to be modestly free cash flow generative in 2020 and 2021 on working capital benefits and the reduction of inventory.

The SGL-3 Speculative Grade Liquidity rating considers the company's adequate liquidity profile. This was comprised of $93 million in cash at March 31, 2020 and $224 million of availability under its $400 million revolving credit facility (RCF) after considering $170 million in borrowings and $5.9 million in Letters of Credit issued. Given the expectation of free cash flow generation in fiscal 2020, some level of repayment under the RCF is anticipated. Carpenter's $250 million 5.2% notes mature in July 2021. Inability to refinance would impact the liquidity profile.

The negative outlook contemplates that improvement in key end markets, most importantly aerospace and defense, will be more protracted than currently anticipated and that improving trends over the next 12 -- 18 months will be slow with risk to a more protracted recovery time frame.

Carpenter, like others in the steel, specialty metals and alloys industry is engaged in manufacturing processes that are energy intensive and produce carbon dioxide and greenhouse gases. The company, together with others in its industry faces numerous environmental regulations and pressures to reduce greenhouse gas and air pollution emissions, among a number of other sustainability issues and will likely incur costs to meet increasingly stringent regulations. Carpenter, as a US company, is subject to numerous regional, state and Federal regulations, including but not limited to the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Responsible Compensation & Liabilities Act (CERCLA). From a social perspective, a portion of Carpenter's workforce is covered by various collective bargaining agreements. From a governance perspective, the company has evidenced a conservative and disciplined approach to its capital structure.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's would consider an upgrade of Carpenter's credit ratings if leverage (adjusted debt/EBITDA) improves, on a sustainable basis, to below 3.5x, interest coverage, on a sustainable basis (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.

Carpenter'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 key customers or an extended slump in the aerospace markets beyond what is currently contemplated (approximately 2-3 years) 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%, (Cash flow from operations less dividends)/debt is sustained below 20% or free cash flow is negative.

Carpenter Technology Corporation, headquartered in Philadelphia, PA, is a producer and distributor of specialty materials, including stainless steel, titanium alloys and specialty alloys. The company operates through two business segments: Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP), with the SAO segment contributing the bulk of the revenues and earnings. The company continues to focus on strategic investments in metal powder solutions and additive manufacturing capability. Revenues for the twelve months ended March 31, 2020 were $2.4 billion.

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.

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

No Related Data.
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