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Moody's Cuts Alcoa's (AA) Unsecured Rating to Ba1; Assigns CFR Ba1

May 29, 2013 4:05 PM EDT
Moody's Investors Service downgraded the senior unsecured debt ratings of Alcoa Inc. (NYSE: AA) to Ba1 from Baa3 and assigned a Ba1 Corporate Family Rating and a Ba1-PD Probability of Default Rating. Moody's confirmed the Ba2 preferred stock rating. At the same time, Moody's withdrew the company's Prime-3 commercial paper rating and assigned a Speculative Grade Liquidity Rating of SGL-1. This concludes the review for downgrade initiated on December 18, 2012. The rating outlook is stable.

Downgrades:

..Issuer: Alcoa Inc.

....Multiple Seniority Shelf Feb 17, 2014, Downgraded to (P)Ba1 LGD4, 54% from (P)Baa3

....Senior Unsecured Conv./Exch. Bond/Debenture Mar 15, 2014, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Ba1 LGD4, 54% from (P)Baa3

....Senior Unsecured Regular Bond/Debenture Jan 15, 2028, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jun 15, 2018, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2027, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 23, 2019, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 23, 2022, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2017, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Feb 1, 2037, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jul 15, 2013, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Jul 15, 2018, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Aug 15, 2020, Downgraded to Ba1 LGD4, 54% from Baa3

....Senior Unsecured Regular Bond/Debenture Apr 15, 2021, Downgraded to Ba1 LGD4, 54% from Baa3

..Issuer: Chelan County Development Corporation, WA

....Senior Unsecured Revenue Bonds Dec 1, 2031, Downgraded to Ba1 LGD4, 54% from Baa3

..Issuer: Iowa Finance Authority

....Senior Unsecured Revenue Bonds Aug 1, 2042, Downgraded to Ba1 LGD4, 54% from Baa3

Assignments:

..Issuer: Alcoa Inc.

.... Corporate Family Rating, Assigned Ba1

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-1

Outlook Actions:

..Issuer: Alcoa Inc.

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Alcoa Inc.

....Pref. Stock Preferred Stock, Confirmed at Ba2, LGD6, 97%

Withdrawals:

..Issuer: Alcoa Inc.

.... Commercial Paper, Withdrawn , previously rated P-3

....Senior Unsecured Commercial Paper, Withdrawn , previously rated P-3

The downgrade to a Ba1 Corporate Family Rating reflects our expectations that, despite Alcoa's success in reducing costs and improving productivity, continued headwinds pressuring fundamentals in the aluminum industry and aluminum prices , and most specifically the level of performance improvement that can be achieved in the primary segment, will continue to push out the time frame in which debt protection metrics appropriate for an investment grade rating can be achieved. We believe this is likely to continue through 2013 and 2014. Key debt protection metrics such as Ebit/interest and debt/EBITDA at 1.2x and 5.3x respectively for the twelve months through March 31, 2013 remain weak for an investment grade rating as does the (operating cash flow less dividends)/debt ratio of 13.7%. While the company's efforts to improve performance in its alumina and aluminum business are evidencing a degree of success, the full improvement to targeted levels in terms of moving down the cost curve is expected to be achieved by 2015. In addition, although aluminum demand has evidenced year-on-year improvement of approximately 7% to 7.5 % from 2010 through 2012, the aluminum price has been in a downward decline since reaching post recession highs in 2011. Currently LME aluminum prices are ranging in the low $0.80/lb and there appears little catalyst for upward movement.

Chinese growth is slowing as evidenced by its first quarter 2013 GDP growth of 7.7% and more recent flash reports of further slowing while the PMI index in the US is evidencing a weakening trend and much of Europe remains in recession. While pockets of strength are evidenced, most notably in the automotive and aerospace industries, these are not viewed sufficient for a broad based global recovery in the aluminum industry and significant profitability recovery. Although Alcoa's mid stream business (Global Rolled Products) is expected to show improvement and its downstream Engineered Products and Solutions (EPS) business is well positioned, these segments are currently not able to offset the slow profit improvement in the primary business at current debt levels. At adjusted debt levels of approximately $13.3 billion, pro-forma for the repayment of the July 2013 debt maturity, EBITDA needs to reach a run rate of approximately $3.8 billion inorder to achieve more reasonable metrics. Conversely, at a $3 billion EBITDA level, debt would need to reduce by approximately $2.8 billion.

While the company is evidencing success in slightly improving performance at lower price points, given industry dynamics we believe the achievement of metrics appropriate for an investment grade rating remains beyond the rating horizon. We expect leverage, as measured by the debt/EBITDA to remain elevated in 2013 and 2014 and EBIT/interest to remain below 2x during this same time period although evidencing a gradual but improving trend.


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