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Rating Action:

Moody's upgrades ATI's ratings -- CFR to B1; outlook stable

18 Nov 2019

New York, November 18, 2019 -- Moody's Investors Service ("Moody's") upgraded Allegheny Technologies Incorporated 's (ATI) Corporate Family Rating (CFR) and Probability of Default rating to B1 and B1-PD respectively from B2 and B2-PD respectively and the senior unsecured rating to B2 from B3. The senior unsecured rating for Allegheny Ludlum Corporation was upgraded to B2 from B3. ATI's speculative grade liquidity rating was moved to SGL-2 from SGL-3. At the same time, Moody's assigned a (P)B2 senior unsecured rating to ATI's WKSI shelf. The outlook is stable.

"The upgrade acknowledges ATI's improving profit margins and business growth, which is expected to accelerate in 2020 as the new aero engines roll out, new orders are received and new pricing on contracts continues to favorably impact performance said Carol Cowan, Senior Vice President and lead analyst for ATI.

Assignments:

..Issuer: Allegheny Technologies Incorporated

....Senior Unsecured Shelf, Assigned (P)B2

Upgrades:

..Issuer: Allegheny Ludlum Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to B2 (LGD4) from B3 (LGD4)

..Issuer: Allegheny Technologies Incorporated

.... Probability of Default Rating, Upgraded to B1-PD from B2-PD

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

.... Corporate Family Rating, Upgraded to B1 from B2

....Senior Unsecured Regular Bond/Debenture, Upgraded to B2 (LGD4) from B3 (LGD4)

Outlook Actions:

..Issuer: Allegheny Ludlum Corporation

....Outlook, Remains Stable

..Issuer: Allegheny Technologies Incorporated

....Outlook, Remains Stable

RATINGS RATIONALE

ATI's B1 CFR reflects the company's continued strengthening in its end market deliveries and improving margins as the newer contracts become more predominate in the overall mixture and value-added revenues increase. ATI's performance continues to benefit from the ongoing production ramp of the next gen aero engines, improving demand for airframes as well as in defense. Strengthening in shipment levels, both in the high value and standard segments together with improving price realizations on the portfolio as a whole are contributing factors and expected to be sustained given the substantive backlogs in the aerospace industry (Aerospace and Defense account for roughly 50% of revenues). While there is some softness in the automotive and energy markets, the company's broad product and customer exposure in the aero industry, particularly aero engines will drive improving performance, as will the absence of the issues with nickel powder billet following the company's ramp-up and qualification of its own production line to address prior sourcing issues. This had a temporary cost impact that will be absent going forward. Additionally, ATI has been able to improve performance in its flat rolled segment to modestly profitable although some quarterly fluctuations are to be expected.

While leverage, as measured by the adjusted debt/EBITDA ratio has increased for the twelve months ended September 30, 2019 to 4.9x, (3x unadjusted) this reflects some operating headwinds in 2019 not expected to be repeated in 2020, which have impacted 2019 earnings performance. Leverage is expected to moderate to around 4x over the near-term and improve throughout 2020. Additionally, the company is expected to remain free cash flow generative.

The rating also recognizes ATI's position as a leading producer of specialty titanium and titanium alloys, nickel-based alloys and super alloys, providing the company the opportunity to fulfill unique product requests from its customers. The company benefits from long term agreements (LTA's) with many of its customers across the airframe, aero engine, electrical distribution and generation, oil and gas as well as medical. The recently signed new LTA with BWX Technologies, which runs through mid-2026, is expected to generate approximately $600 million through the contract dates.

From a social perspective, approximately 40% of ATI's workforce is covered by various collective bargaining agreements, (CBA) predominately with the USW (United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied and Industrial Service Workers International Union). The company endured an approximate 7 month lock out over the 2015/2016 time frame with a new contract ratified in March 2016. A new CBA was ratified with certain employees in 2018. The current contract has an expiration date in early 2020.

The stable outlook incorporates expectations that ATI's operating performance and cash flow generation will continue to strengthen on good fundamentals in the aerospace/defense sector, a key market for the company. The outlook also contemplates that while other end market sectors such as automotive and oil and gas may be more muted, performance will be aided by the value-added nature of products sold into these markets. Included in the outlook is the expectation that ATI will continue to evidence a disciplined approach to its capital structure and capital spending.

The SGL-2 Speculative Grade Liquidity rating reflects ATI's good liquidity position supported by its $511 million cash position at September 30, 2019 and its asset-based lending facility (ABL) secured by receivables and inventory of the company's domestic operations maturing September 30, 2024. ATI's cash position has been bolstered by $250 million in proceeds received from the divestitures of non-core assets. The ABL facility includes a $500 million revolving credit facility, ( includeing a $200 million letter of credit sublimit), a fully drawn $100 million term loan and a $100 million delayed draw term loan availability to June 30, 2020. The facility has minimum liquidity requirements to be met 91 days prior to the maturity of the 2021 notes, the 2022 convertible notes and the 2023 notes. ATI is expected to be free cash flow generative in 2019.

The B2 rating on ATI's senior unsecured instruments reflects the effective subordination of unsecured debt in the capital structure relative to the ABL facility. The senior unsecured debt at Allegheny Ludlum (guaranteed by ATI) has the same rating as the senior unsecured debt at ATI given the high level of interdependence between the operations. The instruments are also considered to be at parity given the significantly higher asset values of ATI relative to the asset value of Allegheny Ludlum and the view that given the operating interdependence, ATI would support Allegheny Ludlum.

The rating could be upgraded should the company demonstrate the ability to sustain EBIT margins of at least 8%, EBIT/interest above 3.5x, debt/EBITDA of no more than3.75x and (operating cash flow less dividends)/debt of at least 25%. The rating could be downgraded should the company experience sustained volume and margin declines or should the improving trends in performance and debt protection metrics reverse. Quantitatively, ratings could be downgraded if leverage as measured by the debt/EBITDA ratio is expected to be sustained above 4.5x, EBIT margins are less than 6%, EBIT/interest is expected to be sustained below 2x, (CFO-dividends)/debt is less than 12.5% or free cash flow becomes consistently negative. A significant contraction in liquidity or availability under the ABL could also negatively impact the rating.

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. The company operates through two segments: High Performance Materials and Components and Flat-Rolled Products. Revenues for the twelve months ended September 30, 2019 were $4.1 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

Brian Oak
MD - Corporate Finance
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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