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Rating Action:

Moody's upgrades Century Aluminum's CFR to B3; assigns Caa1 rating to the proposed senior secured notes notes

05 Apr 2021

New York, April 05, 2021 -- Moody's Investors Service, ("Moody's") assigned a Caa1 rating to Century Aluminum Company's ("Century") new $250 million senior secured notes due 2028. Moody's also upgraded Century's Corporate Family Rating (CFR) to B3 from Caa1 and the Probability of Default Rating to B3-PD from Caa1-PD. The proceeds from the proposed notes will be used to refinance the existing senior secured notes due 2025, for general corporate purposes and to pay for related transaction fees and expenses. The rating of the existing notes will be withdrawn after the close of the transaction. The Speculative Grade Liquidity rating remains SGL-3. The outlook is stable.

"The ratings upgrade reflects the recovery in aluminum demand and prices, the signing of the new 3-year Mt. Holly power contract with Santee Cooper and Moody's expectations that higher earnings and cash flow generation will meaningfully improve Century's credit profile over the next 12-18 months," said Botir Sharipov, Vice President and lead Analyst for Century Aluminum.

Upgrades:

..Issuer: Century Aluminum Company

.... Corporate Family Rating, Upgraded to B3 from Caa1

.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD

Assignments:

..Issuer: Century Aluminum Company

....Senior Secured Regular Bond/Debenture, Assigned Caa1 (LGD4)

Outlook Actions:

..Issuer: Century Aluminum Company

....Outlook, Remains Stable

RATINGS RATIONALE

Century's B3 Corporate Family Rating (CFR) reflects its modest size, relatively high cost position and its exposure to the volatile global aluminum market fundamentals which have improved after being severely impacted in 2020 due to the impact of the pandemic on the aluminum end-markets. The high sensitivity of Century's earnings and cash flows to incremental changes in alumina and aluminum prices which cause wide fluctuations in credit metrics are limiting factors for the company's credit rating. The rating also considers the stability of the company's offtake, most of which is under contract with Glencore plc (Baa1, negative), which also owns 42.9% of Century's outstanding common stock.

Aluminum demand from the automotive, aerospace, and general manufacturing sectors deteriorated sharply in early 2020. LME Aluminum prices declined to near $1,400/ton in April 2020 while alumina prices bottomed out near $225/ton, which along with lower energy and other input prices mitigated the impact of the temporary collapse in aluminum prices. However, aluminum prices recovered rather quickly to pre-pandemic levels and are currently trading above $2,200/ton benefitting from the improved fundamentals, rebound in automotive production after coronavirus related disruptions in 2020, and the recovery in China's aluminum demand in part due to significant infrastructure and construction stimulus programs. Regional Midwest Premium has recently exceeded $430/ton reflecting the currently strong domestic aluminum demand.

Although the global economic environment has improved after a challenging 2020, Moody's expects global aluminum market to remain oversupplied in 2021. Aluminum prices are expected to decline from current levels given the slow recovery in the global aerospace sector, key end market for aluminum, challenges currently faced by the automotive industry due to semi-conductor shortages and the continued growth in smelting capacity in China that accounts for more than 50% off the global production and consumption of aluminum. LME aluminum stocks remain higher than in prior years despite falling from the pandemic-induced highs seen in 2020. While China's aluminum exports declined for two consecutive years as global demand weakened and it became a net importer of unwrought aluminum products, indicating a swift rebound in domestic demand relative to the rest of the world, China remains a substantial net exporter of semi-fabricated aluminum and foil products.

While Century's credit metrics deteriorated in 2020, the company was able to generate positive free cash flow of $30 million driven by lower input and operating costs, inflow of cash from working capital release and reduced capex. The company has recently signed a new 3-year power agreement with Santee Cooper that will enable it to increase the Mt. Holly smelter production from 50% to 75% of the facility's capacity at the capital cost of about $50 million. Considering Q1 prices, the aluminum and alumina pricing lag and assuming average 2021 realized prices in the $1,850-$2,000/ton range for aluminum, Midwest premium of $350/ton (lower than spot price and regional premium, respectively) and $300/ton alumina price, Moody's estimates that Century's 2021 Moody's-adjusted EBITDA will be in the range of $80-140 million and Moody's adjusted debt/EBITDA in the range of 3x-6x. The wide range of our estimates reflects the high sensitivity of the company earnings to aluminum prices. Based on these assumptions and after factoring in the Mt Holly capex, Moody's also expects the company to generate slightly negative to breakeven free cash flow in 2021. If aluminum prices and Midwest premium do not decline materially from current levels, Century will generate meaningful positive free cash flow in 2021.

The stable outlook reflects Moody's expectations that aluminum market fundamentals will remain stable and supportive the company's credit profile and that Century's debt protection metrics will evidence meaningful improvement in 2021 and that the company will maintain an adequate liquidity position.

Century faces a number of ESG risks, typical for a primary aluminum producer, including the risks related to carbon dioxide emissions by its smelters, stringent environmental regulations governing third party coal-fired plants that supply some of the company's energy requirements as well as its highly unionized workforce, which represents about 65% of the total workforce.

Century's SGL-3 speculative grade liquidity rating considers the company's adequate liquidity supported by cash balances of $82 million at December 31, 2020 and availability of about $96 million, net of letters of credit, under its $175 million asset based credit facility (ABL) maturing in May 2023 and $5 million in availability under its Iceland subsidiary's $50 million revolving credit facility, which expires in November 2022. Proceeds from the offering of $75 million senior unsecured convertible notes (not rated) which are being offered by Century concurrently with the new senior secured notes, will be used to repay the $45 million outstanding under its Iceland subsidiary's $50 million revolving credit facility, increasing the availability under the RCF to $50 million. Century is expected to have $80 million in cash on hand at the transaction close. The $175 million ABL has a springing financial covenant that requires the company to maintain a fixed charge coverage ratio of at least 1x when availability is less than or equal to $17.5 million.

The Caa1 rating on the new senior secured notes reflects their weaker position in the capital structure behind the company's $175 million ABL and $50 million Iceland subsidiary credit facility (both unrated). The secured notes benefit from a second priority lien on all domestic assets, stock of domestic subsidiaries, and 100% of stock of foreign subsidiaries. Because the company does not currently have domestic first lien funded debt other than the ABL, the secured notes effectively have a first lien claim on the domestic assets not pledged to the ABL.

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

The ratings upgrade would be considered if the company lowers the overall debt to levels that will enable it to better withstand the volatility in aluminum prices during economic downturns. Quantitatively, the ratings could be upgraded if the company demonstrates a sustainable EBIT margin of at least 6%, EBIT/interest of 3.0x and leverage, measured as adjusted debt/EBITDA ratio, of below 4.5x.

The rating could be downgraded should, on a sustained basis, the EBIT margin remain below 2%, EBIT/interest at less than 1.5x and debt/EBITDA ratio at above 5.5x, or if the liquidity deteriorates meaningfully.

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.

Headquartered in Chicago, Illinois, Century is a primary aluminum producer in North America and Iceland with ownership interests in four aluminum production facilities. The company also produces carbon anodes at its Century Vlissingen facility in the Netherlands. Revenues for the twelve months ended December 31, 2020 were $1.6 billion. Glencore plc and its affiliates own 42.9% of Century's outstanding common stock.

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_1243406.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Botir Sharipov
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

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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