S&P Cuts Allegheny Technologies (ATI) to 'B'; Notes Business Risk Profile Deterioration

S&P Global Ratings said that it has lowered its corporate credit rating on Allegheny Technologies Inc. (NYSE: ATI) to 'B' from 'B+'. The outlook is negative.

At the same time, we lowered our issue-level ratings on the company's senior unsecured debt to 'B' from 'B+'. The recovery rating on the unsecured notes remains '3'. We also raised our issue-level rating on the senior unsecured debt of ATI's subsidiary, Allegheny Ludlum, to 'BB-' from 'B+'. We also revised the recovery rating on these unsecured notes to '1' from '3'.

"The downgrade is due to our view that the company's business risk profile has deteriorated to fair from satisfactory," said S&P Global credit analyst William Ferara. "ATI's less specialized flat-rolled stainless steel products are facing increasing competition, especially from lower-priced imports, which is pushing down market prices and operating margins and leading to overall pressure on the company's business risk profile." ATI can pass through (with a time lag) some costs of raw materials, but its prices are restrained by the bargaining power of its large customers and competitive pressures, which have been intensified by weaker demand conditions. The company continues to benefit from several long-term agreements with strategic aerospace customers it entered into and that support long-term revenue growth and help support the business risk profile. We believe the company's technical capabilities give it competitive advantages for a wide range of high-value-added specialty metals, such as titanium castings for jet engines. ATI maintains good end markets and geographical diversification, offset by its fairly capital-intensive nature and exposure to highly competitive pricing and volatile raw material costs.

The negative outlook reflects the risk that continued weakness in the company's credit metrics and liquidity position over the next 12 months, as well as its business risk profile, could lead to a lower rating. A weak pricing environment and deteriorating demand trends are pressuring ATI; however, cost reduction efforts and additional long-term agreements in the aerospace segment are helping to somewhat offset these challenges in 2016. We expect debt to EBITDA of slightly above 10x and EBITDA interest coverage of roughly 1x-1.5x in 2016.

We could lower the rating if the company's business risk profile deteriorates to weak from fair or we expect debt to EBITDA will be sustained notably above 8x and EBITDA interest coverage below 1.5x throughout 2016 and 2017. This could occur if shipments to ATI's key aerospace, energy, or other markets continue to weaken, competitive pressures further erode prices and margins, or it does not achieve targeted cost reductions. We could also lower the rating if the company's liquidity profile were to meaningfully deteriorate and we assessed its liquidity profile as less than adequate.

We could revise the outlook to stable if ATI is able to improve its operating and financial performance and we believe the improvement will be sustained. Specifically, we would expect improved market conditions and for debt to EBITDA to be notably less than 8x, with EBITDA interest coverage of above 2x in 2016. We view this scenario to be less likely over the next year given our expectation for continued pricing pressure and challenging demand conditions in this timeframe. We do not view an upgrade as likely in the next 12 months given market conditions and stainless steel price expectations.

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