Howmet Aerospace Inc | Fixed Income Analysis

In evaluating the note, we compared Howmet to similar companies in the aerospace and defence industry. In this case, we opted to compare Textron (TXT), a Rhode Island US-based Industrial Conglomerate with Aerospace development operations, and HEICO, an aerospace and electronics company that also manufactures parts used in aircraft, spacecraft, and defense equipment and hence directly comparable to Howmet. Notably, both comparisons are investment grade (ranging between BBB- and BBB+ specifically). As well as being a larger and more diversified conglomerate TXT currently outperforms HEI and HWM on each of the credit metrics shown in the table above and trades at a spread to treasuries (G-Spread) of approximately 126.54 basis points. However, when we focus on HEI which is also a more niche manufacturer of parts for aircraft, spacecraft, and defense equipment, we note that HWM currently has better interest coverage, FCF metric, and lower Net leverage, which is expected to fall even further by the end of the year as the Company continues to prioritize debt reduction. Despite this, we note that HWM trades at a spread of 168.81, compared to $117.56 for HEI. As such, we expect there to be more room for spread tightening as HWM continues to deleverage and further solidify its spot as an investment-grade option.

Further to the relative analysis we also looked at the historical spread analysis of the HOWMET 2028 note. From this, we note that since mid-2022, the Company has seen spreads decline drastically from over 360 basis points to a little over 160 basis points as of September 14, 2023. This coincides with the improved profitability of the Company and the continued management deleveraging which ultimately culminated in the rating upgrade this year. Hence, spreads are currently at a two-year low. However, with the industry trends of improved global travel and increased global defence spending, coupled with management continuing to target lower levels of leverage, we believe that further spread compression given improving fundamentals is still possible despite the historically tight spreads. In this regard, we recommend investors OVERWEIGHT this note as we believe it gives investors exposure to an industry with strong tailwinds, while also being able to enjoy fairly high yields on an investment grade issue with a positive fundamental trajectory.