We consider Allegheny's liquidity position to be "strong." Relevant aspects of our assessment of the company's liquidity profile include the following expectations and assessments:
-- Sources of liquidity over the next couple of years will exceed uses by 1.5x or more;
-- Liquidity sources will exceed uses even if EBITDA were to decline 30%; and
-- In our view, the company likely would remain in compliance with financial maintenance covenants even if EBITDA were to drop 30%.
The company's maturities are manageable--its next significant debt maturity is not until 2014, when its $403 million convertible notes mature.
As of June 30, 2012, Allegheny had about $600 million of available liquidity, consisting of an estimated $210 million of unrestricted balance sheet cash and about $393 million available on its $400 million senior revolving credit facility due April 2017.. Covenants on this facility include a leverage test of 3.25x and an interest coverage test of 2x. The covenant calculation defines debt as book debt net of cash in excess of $50 million. The company is comfortably within its covenants, and we expect it to remain in compliance based on our current assumptions.
Allegheny had free cash flow of about $80 million for the 12 months ended June 30, 2012, after $346 million in capital expenditures and a $65 million increase in working capital. For full-year 2012, we expect Allegheny to generate negative free cash flow. The company has initiated aggressive capital programs during the past several years and continues to add to and upgrade its production capacity. We anticipate capital expenditures will be between $450 million and $500 million in each of the next couple of years on the company's advanced hot rolling mill and processing facility in Brackenridge, Pa., and various smaller projects. In our view, the company should be able to fund this additional spending through cash balances and internal cash flow generation. Still, we would expect Allegheny to adjust its capital expenditures to reflect market conditions and to maintain adequate financial flexibility if demand and margins are lower. We expect Allegheny to maintain cash balances of at least $200 million its $75 million annual dividend, but we do not expect the company to use cash for share repurchases.
The positive outlook reflects our expectation that Allegheny's key end markets--including aerospace, defense, and global infrastructure--will continue to gradually recover over the next couple of years. Under our current assumptions, we believe financial performance could improve sufficiently to bring financial metrics in line with our expectations for a higher rating by the end of 2013, based on our assumption that adjusted EBITDA will be $750 million or above area in 2013 and the company will not add additional debt. We expect adjusted debt-to-EBITDA will be 3x or below by the end of 2013. We also expect that the company will maintain strong liquidity (including internal cash flow generation, revolving credit facility availability, and cash balances) to fund its operations and capital expenditure program without incurring further debt.
We could upgrade Allegheny if its end markets continue to rebound, if it completes its aggressive growth plans without increasing debt, and if we see management pursuing a conservative financial policy. Specifically, we could raise the rating if markets recover to a point that adjusted debt-to-EBITDA falls and remains below 3x, FFO-to-debt exceeds 30%, and cash flow generation is sufficient to internally fund capital spending.
A downgrade seems less likely in the coming months given our current expectations regarding financial performance. However, one could occur if markets deteriorate due to global economic weakness that reduces demand for the company's products, causing operating performance to deteriorate below our expectations. Specifically, we could lower the rating if adjusted debt-to-EBITDA rises above 3.5x and FFO-to-total debt falls and remains below 30% on a sustained basis, and cash reserves drop below $200 million.
Related Criteria And Research
-- Key Credit Factors: Methodology and Assumptions on Risks In the Metals Industry, June 22, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008