New York, January 23, 2020 -- Moody's Investors Service, ("Moody's") assigned
Arconic Rolled Products Corporation (Arconic) a Ba2 Corporate Family Rating
(CFR), a Ba2-PD Probability of Default rating and a Ba1 rating
to the company's $1 billion senior secured first lien revolving
credit facility and $800 million senior secured first lien Term
Loan B. The outlook is negative. This is the first time
Moody's has rated Arconic Rolled Products Corporation.
Arconic Rolled Products Corporation is the spin off from its parent,
Arconic Inc of the Global Rolled Products, Extrusions, and
Building and Construction businesses. At the time of separation,
Arconic Rolled Products Corporation will pay a distribution to Arconic
Inc. Upon completion of the spin, Arconic Rolled Products
Corporation will be renamed Arconic Corporation and Arconic Inc.
will be renamed Howmet Aerospace Inc.
"The Ba2 CFR reflects Arconic's end market diversity and global
footprint but incorporates softer market conditions in several of its
end markets as well as the expected impact of Boeing's production
suspension of its 737 Max, which will affect all suppliers to this
Boeing platform. ARP's environmental and other unknown magnitude
of liabilities from the Grenfell fire are also considerations in the CFR
rating" said Carol Cowan, Senior Vice President and lead analyst
for Arconic.
Assignments:
..Issuer: Arconic Rolled Products Corporation
.... Probability of Default Rating,
Assigned Ba2-PD
.... Corporate Family Rating, Assigned
Ba2
....Senior Secured Bank Credit Facility,
Assigned Ba1 (LGD2)
Outlook:
..Issuer: Arconic Rolled Products Corporation
....Outlook, Assigned Negative
RATINGS RATIONALE
The CFR considers Arconic's strong and leading position in the mid-stream
aluminum industry with a broad operating footprint and diversified end
market exposure that provides market and geographic diversity.
Arconic will be a midstream aluminum producer providing aluminum sheet,
plate and other products to a diversity of end markets. The company
operates through 5 market segments: Ground Transportation (36%
of revenues), Aerospace (16%), Building and Construction
(18%), Industrial (16%) and Packaging (14%),
all as of year-end December 31, 2018. Of the revenue
dispersion, GRP (Global Rolled Products) is by far the largest contributor
at roughly 78% and is assumed to be the largest generator of EBITDA.
Revenues in 2018 were $7.2 billion and for the nine months
ended September 30, 2019 were $5.6 billion,
with adjusted EBITDA (unaudited) of roughly $555 million for the
nine months through September 30, 2109
While representing a diverse end market exposure, these markets
remain subject to volatility and economic conditions. In the transportation
industry, representing approximately 36% of sales,
the company has multi-year contracts and provides value added sheet
products to platforms such as the Ford F150 and other platforms enhancing
mix and profitability. In the aerospace industry, accounting
for roughly 16% of revenues, the company has multi-year
contracts and supplies all sheet and plate to all models of the Boeing
Commercial Airlines Company.
Arconic's expansion over the last number of years into aluminum
body sheet to the automotive market has contributed to an improved product
mix and higher value-added sales. However, with the
continued development of high strength and next gen steels, we believe
the pace of changeover could slow. Additionally, from a light
vehicle sales perspective we believe light vehicle sales have peaked and
will be lower year-on-year although still healthy at in
excess of 16 million units in 2019.
Arconic's business model is a margin on metal construct with the
aluminum price and premiums passed through to the customer or in some
cases hedged. As is typical in the industry there can be a lag
where aluminum price movements impact performance on a quarterly basis.
However, fundamentals for common aluminum alloy products have improved
with the imposition of antidumping and countervailing duties on imports
from China.
Arconic has a strong position within the aerospace industry in terms of
its sales to the major airplane manufacturers and the aero industry has
a strong backlog. However, the situation at Boeing and stopping
of production of the 737 MAX at this point in time will impact companies
in the supply chain, including Arconic. Once production were
to resume, the ramp is expected to be slower than might be anticipated.
Consequently, revenues and earnings from the aerospace segment are
expected to decline in 2020 although the company's position on other
aircraft will help to soften the degree of impact. Additionally,
given slowing economic expectations, softening in industrial activity
is evident as indicated by recent PMI readings which will contribute to
less robust conditions in other end markets served.
While the CFR reflects Arconic's solid position in markets served,
the quantitative metrics are countered by several factors. These
would include potential liabilities related to the Grenfell Tower litigation
and related class action suits, although this has a long tail and
is not quantifiable at this time, environmental remediation expenditure
requirements that will pass to the spin-co company, and the
fact that the new company does not have an established track record as
to financial discipline, execution on strategic objectives or ability
to achieve anticipated margin and earnings improvements.
Incorporated in the CFR's however is the liquidity support provided
by the approximately $1 billion secured, cash flow based
revolving credit facility.
The negative outlook reflects the uncertainty surrounding the duration
of the Boeing production suspension and the ultimate impact on performance
of Arconic Rolled Products. The outlook also captures the slowing
economic environment and softening in a number of markets served by the
company, including the transportation markets including automotive,
although contraction here is expected to be relatively modest.
However, the company is expected to be conservatively capitalized,
allowing for some cushion in weakening in performance and metrics.
Ratings are unlikely to be upgraded in the next 12 -- 18 months given
the uncertainty surrounding Boeing's resumption of production on
the 737 Max and the need for Arconic to demonstrate a disciplined approach
to its financial policy and capital allocation. Given the volatility
in the industry and end markets, ratings could be upgraded over
time should the company achieve sustainable EBIT margins in excess of
8%, Debt/EBITDA of less than 3x and (Cash Flow from operations
less dividends)/debt of at least 30%. Ratings could be downgraded
should the EBIT margin be sustained below 6.5%, leverage
be sustained above 3.5x or (cash flow from operations less dividends/debt)
be sustained below 20%.
The Ba1 rating on the first lien revolving credit facility and term loan
B reflects their superior position in the capital structure.
Headquartered in Pittsburgh, PA, Arconic Rolled Products is
a downstream aluminum producer active in a number of diverse end markets.
Revenues in 2018 were $7.2 billion.
The principal methodology used in these ratings was Steel Industry published
in September 2017. Please see the Rating Methodologies page on
www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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.
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: 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
