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Rating Action:

Moody's downgrades Howmet Aerospace (formerly Arconic Inc.) ratings (CFR to Ba3); outlook negative

14 Apr 2020

Approximately $6 billion of rated debt affected

New York, April 14, 2020 -- Moody's Investors Service ("Moody's") downgraded its ratings for Howmet Aerospace Inc. (Howmet), including the company's corporate family rating (CFR) and probability of default rating (to Ba3 and Ba3-PD, respectively), and the senior unsecured debt ratings (to Ba3, from Ba2). Howmet's speculative grade liquidity (SGL) rating was downgraded to SGL-2 from SGL-1. The ratings outlook is negative.

The downgrades reflect Moody's expectation that 2020 will be a very challenging year for commercial aerospace suppliers with double-digit earnings declines stemming from a significant reduction in commercial aerospace production by Tier 1 OEMs and suppliers. Stress on the supply chain will result in unprecedented deterioration in earnings and cash flows, resulting in key credit metrics that will remain strained for some time.

Moody's expects a weakening in earnings as a consequence of the disruption to the commercial aerospace industry emanating from the coronavirus outbreak. Reduced commercial aerospace production at both Boeing and Airbus are expected to put downward pressure on both the company's top line and earnings.

The negative outlook reflects heightened uncertainty surrounding Howmet's ability to de-lever given top-line and earnings pressure from lower commercial aerospace production and ongoing disruption from both the 737 MAX production halt and the coronavirus pandemic.

The rapid and widening spread of the coronavirus outbreak, the 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 aerospace & defense sector is directly exposed to the airline sector, which has been one of the sectors most adversely affected by the shock given its sensitivity to consumer demand and market sentiment, and global travel restrictions. More specifically, Howmet's elevated financial leverage post-spin from Arconic coupled with its heavy exposure to the commercial aerospace and commercial vehicle sectors leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions, and the company remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's actions reflect the impact on Howmet of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The following rating actions were taken:

Downgrades:

..Issuer: Howmet Aerospace Inc.

.... Corporate Family Rating, Downgraded to Ba3 from Ba2

.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-2 from SGL-1

....Pref. Stock Preferred Stock, Downgraded to B2 (LGD6) from B1 (LGD6)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 (LGD4) from Ba2 (LGD4)

..Issuer: Iowa Finance Authority

....Senior Unsecured Revenue Bonds, Downgraded to Ba3 (LGD4) from Ba2 (LGD4)

Outlook Actions:

..Issuer: Howmet Aerospace Inc.

....Outlook, Remains Negative

RATINGS RATIONALE

Howmet's Ba3 CFR broadly reflects the company's considerable revenue scale (approximately $7 billion) and well-established market position as a key supplier to the aerospace & defense OEM and Tier I suppliers, where the company maintains a significant presence across key program platforms. The company possesses a healthy margin profile that generally translates to high free cash flow conversion. Moody's expects margins to meaningfully decline from the current (approx. 23%) high level, however, due to near-term top line revenue pressures from expected material reductions in commercial aerospace production levels over 2020—2021. The company enjoys a good liquidity profile, nonetheless, with sizeable cash balances and backstop revolver capacity bolstered by a commitment to abstain from share repurchases which combined will help it manage through the coming challenging period.

Although the company's operating and free cash flow have improved meaningfully over the past year, the unprecedented sector and macroeconomic environment will weigh considerably on forward earnings and free cash flows. Howmet's balance sheet also reflected a more levered profile proforma for the company's separation from the former Arconic entity, and Moody's believes that debt/EBITDA will increase from the already elevated 4x level (including the sizeable $1 billion underfunded pension obligation) to more than 6x over the coming 12-18 months.

Corporate Governance and related financial policy is a also a credit consideration. After multiple CEOs over the preceding few years, the company announced in February 2020 that John Plant would continue as co-CEO (with Tolga Oal, former President of Arconic Engineered Structures) post-spin under a new three-year employment agreement. Additionally, Moody's views the marked increase in cash deployed towards share repurchases as a shift in Howmet's financial policy, one that prioritizes shareholder returns instead of what could otherwise be more aggressive debt reduction from current elevated leverage levels. Moody's also notes that activist shareholder Elliott management remains the company's largest shareholder and has representation on the Board. Moody's expects that the shift to relatively more aggressive financial policies will be maintained once the company's end markets resume somewhat normalized activity levels.

Beyond governance, environment and social considerations have also been factored into the ratings. On the environmental front, the company is expected to benefit from the long-term trend towards light-weighting and increased fuel efficiency. Social risk considerations include the lower cost flexibility and related sizable pension arising from the portion of the company's workforce that is expected to continue to be unionized.

Howmet's SGL-2 speculative grade liquidity rating reflects the deemed good profile anticipated over the coming year, with an expectation of positive free cash flow and ample availability under the company's undrawn $1.5 billion unsecured revolving credit facility. Moody's expects future free cash flows to be driven by EBITDA margins in excess of 15%, bolstered by proactive and meaningful cost reductions to contend with the negative impact on demand from the coronavirus outbreak and maintenance of operating and working capital efficiencies attained over the last year, with capital expenditures at roughly 4% of sales.

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

The ratings could be downgraded if the company experiences an erosion in EBITDA margins to below 12% and free cash flow turns negative. In addition, debt-financed share repurchases, dividends and acquisitions or spin-offs that further elevate financial leverage as the company contends with end-market headwinds could also pressure ratings downward.

The ratings could be upgraded if the company's top line grows organically through positive end-market fundamentals, debt/EBITDA trends improve to the 4x level post-2020, FCF/debt exceeds 5% and the company maintains a good liquidity profile. The company's ability successfully execute on its cost reduction actions, including sustaining EBITDA margins above 15% will be important considerations to any prospective ratings upgrade.

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108840. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Pittsburgh, Pennsylvania, Howmet Aerospace is a major global player in the lightweight metals and high performance multi-materials sector that serves the aerospace and commercial transportation end-markets. Over 70% of the company's revenues are derived from the aerospace and defense end-market. 2019 pro forma sales totaled approximately $7 billion.

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.

Jadijhe (Gigi) Adamo
Vice President - 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

Russell Solomon
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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